Financial Literacy and High-Cost Borrowing in the United States

42 Pages Posted: 20 Apr 2013

See all articles by Annamaria Lusardi

Annamaria Lusardi

George Washington University - Department of Accountancy; National Bureau of Economic Research (NBER)

Carlo de Bassa Scheresberg

George Washington University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 2013

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.

Suggested Citation

Lusardi, Annamaria and de Bassa Scheresberg, Carlo, Financial Literacy and High-Cost Borrowing in the United States (April 2013). NBER Working Paper No. w18969. Available at SSRN: https://ssrn.com/abstract=2254222

Annamaria Lusardi (Contact Author)

George Washington University - Department of Accountancy ( email )

George Washington University School of Business
Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/profiles/annamaria-lusardi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Carlo De Bassa Scheresberg

George Washington University - School of Business ( email )

Washington, DC 20052
United States

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