Buy now, default later. - To what extent does the interest rate of consumption loans impact the future purchasing power in Sweden?

Abstract

How does an increase in the interest rate affect the share of household income devoted to monthly debt payments? Over recent decades, loans and credits to consumption in Sweden have risen at a pace higher than that of other types of debt, such as mortgages. Although loans and credits to consumption still account for a relatively small portion of the total debt, (about 20% of the aggregated Swedish private debt) they amount to a substantial part of the households’ monthly debt payments. These types of loans and credits have been issued at a relatively high interest rates even as lending rates in general have remained at record low levels. Taken together, this leaves many borrowers vulnerable to an increase of the interest rates. We examine the effect on household income devoted to monthly debt payments from a change in the interest rate using a VAR-model and by estimating the associated impulse response functions to trace out the impact of a shock to the interest rate. The analysis is based on Swedish quarterly time series data spanning from Q4 2005 to Q2 2021. The results indicate that a positive shock to the interest rate induces a lasting increase in the share of income devoted to monthly debt payments.