Importance of Subjective Financial Knowledge and Perceived Credit Score in Payday Loan Use

Abstract

This study examined the factors associated with consumers’ decisions to use payday loans. Using a sample of 24,201 respondents from the 2015 National Financial Capability Study (NFCS), structural equation modeling was used to analyze the relationships among the variables. The results indicated that payday loan use was associated with a series of consumers’ socio-psychological factors, including financial knowledge, perceived credit score, credit-card payment problems, and having emergency funds. The findings suggested that, to improve borrowing decisions and industry practices, discussions about consumers’ payday loan use and its underlying repayment problems should encompass policy intervention and institutional attention, rather than focusing on behavioral modification at the individual level alone.

Debt and Overindebtedness: Psychological Evidence and its Policy Implications

“…People who have serious debt to one creditor (e.g., a utility company) usually owe money to many similar creditors (Aznar, 2009; Lea et al., 1993). In a debt crisis, people often borrow from very expensive sources, such as unauthorized overdrafts, rent‐to‐own retailers, payday lenders, or door‐to‐door moneylenders who operate on the borders of legality and sometimes with aggressive and misleading marketing (Chen, 2020; Dearden et al., 2010; Lee et al., 2019). Use of such credit sources can cause a small debt to spiral into a much larger one (C. M. Walker, 1996b).…”

Capacitación, consumo y endeudamiento

“…El acceso al crédito para facilitar el consumo ha adquirido mayor importancia y las tarjetas de crédito han llegado ser una herramienta imprescindible, desde uso de préstamos de fondos de emergencia (Demirgüç-Kunt et al, 2020), hasta financiamiento para los días de pago en negocios o empresas (Lee et al, 2019). No obstante, la contratación de cualquier tipo de crédito por encima de la capacidad de pago ocasiona sobreendeudamiento, llevando incluso a la suspensión temporal de pagos (morosidad).…”

Knowledge self-awareness, financial behavior, and economic pressure

“…Studies in Table 1 show that subjective factors, such as one's perceived level of financial expertise, is directly and strongly related to financial practices (e.g., Lee et al, 2019;Robb & Woodyard, 2011;Verma, 2017). These studies point to a common finding that self-evaluation of financial knowledge influences financial behaviors, including retirement planning and emergency funds.…”

“…The concern has advanced since the lack of financial knowledge is likely to influence one's money management and financial goals (Braunstein & Welch, 2002;Danes & Haberman, 2007). Moreover, the failure to have adequate financial knowledge may inhibit individuals from making sound credit decisions and subsequently make them susceptible to debt repayment obligations if they are unprepared for unexpected financial emergencies (Lee et al, 2019).…”

“…The existing literature makes it clear that objective financial knowledge is not the only factor responsible for better financial behavior. Subjective factors, such as one's perceived level of financial expertise, are also directly and strongly related to sound financial practices (Lee et al, 2019;Robb & Woodyard, 2011).…”