Abstract
Consumers with insufficient resources can finance purchases by applying for specific purpose loans or unspecified purpose loans. I examine the default gap of these two types of loans by using a unique dataset of consumer loans from a Czech commercial bank.
In line with theoretical models that perceive collateral as a screening device mitigating adverse selection, the paper confirms a negative relationship between the default rate and the presence of informal collateral. More importantly, it is not the purpose for the loan, but mainly the unobserved characteristics of the borrower that drive the default rate.
The paper also provides empirical evidence that the interest rate differential between specific purpose loans and unspecified purpose loans is systematically higher than their default rate differential.