In Brazil, consumer credit is at high level, study reveals

A study by the Center for Microfinance and Financial Inclusion Studies (FGVcemif) at Fundação Getulio Vargas’ Sao Paulo School of Business Administration (FGV EAESP) reveals that in Brazil, compared to other countries, consumer credit (including payroll loans, non-payroll personal loans and credit cards), not including mortgage loans, is at a high level in relation to the size of the economy (GDP). In addition to this high volume, most of these types of credit have high interest rates, thereby taking up a bigger share of people’s income.

The study shows that until 2016, there was gradual growth in real estate credit and relative stagnation in non-real estate credit. However, after 2016, real estate credit remained relatively constant at around 9% of GDP, while non-real estate credit started to grow, reaching almost 23% of GDP. This growth in personal credit was therefore linked to payroll loans, personal loans and credit cards.

The main types of consumer credit, in addition to mortgage loans (29.2%), are payroll loans (18.5%), credit cards (15.5%), non-payroll personal loans (7.9%) and vehicle loans (8.1%).

According to the study’s authors, Lauro Gonzalez (FGVcemif’s coordinator), João Pedro Haddad (a researcher at FGVcemif) and Julio Leandro (a professor at Mackenzie Presbyterian University and a researcher at FGVcemif), the evolution of consumer credit types seems to reflect the recent trajectory of the Brazilian economy, which has oscillated between recession, stagnation and anemic growth in recent years. “The share of higher-quality credit (mortgages), associated with asset accumulation, greater optimism in the economy and lower interest rates, has decreased, while types of consumer credit typically characterized by higher interest rates and used to mitigate or compensate income losses have gained ground,” they write.

International comparison of personal credit

The study also shows that the growth in this type of credit in Brazil has caused it to be larger in relation to GDP in Brazil (5%) than in the United States (2.7%). “The expansion of credit cards provides increased short-term credit if cards are primarily used as a means of payment and the bills are settled in full, or it can lead to an increase in longer-term credit if the payments are not made, and in this case, interest rates are very high in Brazil,” explains Gonzalez.

Another way to estimate the relative size of consumer credit is to look at mortgage loans as a proportion of total household debt. In the United States, the latest data, presented in the graph below, indicates that mortgages make up 70% of household debt, while non-real estate credit accounts for 30%. In Brazil, the figures are reversed: real estate loans account for only 37.2% of household debt, while 62.8% of debt is likely linked to consumption.

The study concludes that consumer credit payments take up an extremely high share of Brazilians’ income, making families more financially vulnerable while not representing real progress in financial inclusion.

Furthermore, despite having lower interest rates, payroll loans have contributed to growing indebtedness due to recent rule changes, including an increase in the permitted share of income for repayments, favoring excessive debt.

Methodology

The Center for Microfinance and Financial Inclusion Studies (FGVcemif) used several sources of data for this exploratory study about the recent evolution of the personal credit market.