Financial Literacy and High-Cost Borrowing in the United States

Annamaria Lusardi () and Carlo de Bassa Scheresberg

No 18969, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we examine high-cost methods of borrowing in the United States, such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops, and offer a portrait of borrowers who use these methods. Considering a representative sample of more than 26,000 respondents, we find that about one in four Americans has used one of these methods in the past five years. Moreover, many young adults engage in high-cost borrowing: 34 percent of young respondents (aged 18-34) and 43 percent of young respondents with a high school degree have used one of these methods. Using well-tested questions to measure financial literacy, we document that most high-cost borrowers display very low levels of financial literacy, i.e., they lack numeracy and do not possess knowledge of basic financial concepts. Most importantly, we find that those who are more financially literate are much less likely to have engaged in high-cost borrowing. Our empirical work shows that it is not only the shocks inflicted by the financial crisis or the structure of the financial system but that the level of financial literacy also plays a role in explaining why so many individuals have made use of high-cost borrowing methods.

JEL-codes: D91 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-ban
Note: AG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

Downloads: (external link)
http://www.nber.org/papers/w18969.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:18969

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w18969

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().