The socio-economic consequences of risky loans in the Republic of Armenia

Abstract

Certain types of loans are considered risky since they often cause over-indebtedness and lead consumers into a cycle of borrowing. These debt traps can result in poverty which is why government regulation is sometimes needed to address the issue. In Armenia, both poverty and debt levels are high, while the use of consumer loans is widespread. We attempt to find out whether consumer loans in Armenia carry a risk of leading to a debt trap by examining the annual percentage rates (APRs), minimum sizes and durations of consumer loans offered in Armenia and comparing those parameters to the disposable income of an average family in Armenia. We find that most families with an average income cannot pay off standard consumer loans within 1-3 months, even though banks and credit organizations claim that a significant portion of these loans are paid off within that time frame. This inconsistency may mean that consumers are rolling over their loans or paying them off using other loans, which means they have fallen into a debt trap. As a result, we have reason to suspect that debt traps exist in Armenia but further research is required to validate that claim.