Price formation of consumer loans: A theoretical view of Finnish consumer credit market

Abstract

The purpose of this study is to present an economic theory behind the informational asymmetry in a consumer credit market and show how it affects the formation of the loan price. The study presents how lenders can use the available information for better loan decisions and how it affects the interest rates that borrowers observe. The main tools against information asymmetry are the information sharing platforms and the credit scoring models which are presented closely. The theoretical framework follows the model of Jaffee and Russell (1976) which is modified further to fit the different information levels that lenders can acquire about borrowers. Based on this theoretical framework the study presents the Finnish consumer credit market and discusses of the impact that the informational asymmetry has on the detected prices and on the market structure.