The high inflation rates over the last three and a half years have significantly impacted the purchasing power of low-income European families, forcing them to resort to credit for their purchases despite high interest rates. This has led to an increase in consumer loans, installment payments, and stricter criteria from financial institutions. A study published on the European Central Bank’s blog highlights the shift in consumer borrowing patterns, with lower-income families applying for credit more frequently compared to higher-income groups.
The disparity in real wages across Europe has further exacerbated the financial challenges faced by low-income families. Italy experienced a decrease of around 8% in real wages from the end of 2019 to the end of 2023, while Germany saw a decrease of almost 5%. In contrast, Spain showed a slight growth, and Portugal saw an increase of 7%. This uneven wage growth has contributed to the increased reliance on consumer credit among poorer families, with a 4.7% rise in credit applications from April 2022 to January 2024.
While consumer credit applications have increased for low-income families, the opposite trend is observed for wealthier households, who are applying for fewer loans over the same period. Additionally, the rejection rate for loan applications has increased by 5.7%, with banks more likely to reject requests from lower-income families. This has led to a decrease in access to credit for low-income families, mainly due to the composition of loans (more consumer loans, less mortgages) rather than stricter credit standards.
This shifting trend in borrowing patterns highlights the impact of inflation and wage disparities on the financial well-being of European families. Low-income families are increasingly turning to consumer credit to make ends meet, while facing challenges accessing traditional forms of credit such as mortgages. As the gap in wealth and income continues to widen across Europe, policymakers and financial institutions must address these issues to ensure fair and equitable access to credit for all households.
The findings of the study underscore the need for targeted interventions to support low-income families and mitigate the impact of inflation on their financial stability. Addressing wage disparities and increasing access to affordable credit options can help alleviate the burden on these families and prevent further financial strain. By understanding the factors driving the increase in consumer credit among low-income households, policymakers can develop strategies to promote financial inclusion and support economic resilience among vulnerable populations.
In conclusion, the rise in consumer credit applications among low-income European families reflects the challenges they face in navigating a volatile economic environment. As inflation rates and wage disparities persist, it is crucial to address these issues to prevent further financial hardship for vulnerable households. By promoting financial literacy, expanding access to affordable credit options, and implementing targeted policies, policymakers can help alleviate the burden on low-income families and support their long-term financial well-being.
