Financial Literacy and High-Cost Borrowing in the United States

Global Financial Literacy Excellence Center Working Paper No. 2013-1

43 Pages Posted: 27 Mar 2015

See all articles by Annamaria Lusardi

Annamaria Lusardi

Stanford University - Stanford Institute for Economic Policy Research

Carlo de Bassa Scheresberg

George Washington University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 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.

Keywords: financial literacy, high-cost borrowing, alternative financial services

JEL Classification: D91

Suggested Citation

Lusardi, Annamaria and de Bassa Scheresberg, Carlo, Financial Literacy and High-Cost Borrowing in the United States (January 31, 2013). Global Financial Literacy Excellence Center Working Paper No. 2013-1, Available at SSRN: https://ssrn.com/abstract=2585243 or http://dx.doi.org/10.2139/ssrn.2585243

Annamaria Lusardi (Contact Author)

Stanford University - Stanford Institute for Economic Policy Research ( email )

366 Galvez Street
John A. and Cynthia Fry Gunn Building
Stanford, CA CA 94305
United States

HOME PAGE: http://siepr.stanford.edu/people/annamaria-lusardi

Carlo De Bassa Scheresberg

George Washington University - School of Business ( email )

Washington, DC 20052
United States

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