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Financial Literacy and High-Cost Borrowing in the United States

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  • Annamaria Lusardi
  • Carlo de Bassa Scheresberg
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    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.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18969.

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    Date of creation: Apr 2013
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    Handle: RePEc:nbr:nberwo:18969

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    References

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    1. Marianne Bertrand & Adair Morse, 2009. "Information Disclosure, Cognitive Biases and Payday Borrowing," Working Papers 2009-007, Becker Friedman Institute for Research In Economics.
    2. Justine S. Hastings & Lydia Tejeda-Ashton, 2008. "Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico," NBER Working Papers 14538, National Bureau of Economic Research, Inc.
    3. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," CeRP Working Papers 72, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    4. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy around the World: An Overview," NBER Working Papers 17107, National Bureau of Economic Research, Inc.
    5. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2011. "Financial Literacy, Retirement Planning, and Household Wealth," CeRP Working Papers 119, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    6. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
    7. Lusardi, Annamaria & Mitchell, Olivia S. & Curto, Vilsa, 2012. "Financial sophistication in the older population," CFS Working Paper Series 2012/08, Center for Financial Studies (CFS).
    8. repec:ecj:econjl:v:122:y:2012:i::p:449-478 is not listed on IDEAS
    9. Alessie, Rob & Van Rooij, Maarten & Lusardi, Annamaria, 2011. "Financial literacy and retirement preparation in the Netherlands," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 527-545, October.
    10. Lusardi, Annamaria & Mitchell, Olivia S., 2010. "How ordinary consumers make complex economic decisions: Financial literacy and retirement readiness," CFS Working Paper Series 2010/11, Center for Financial Studies (CFS).
    11. Jere R. Behrman & Olivia S. Mitchell & Cindy Soo & David Bravo, 2010. "Financial Literacy, Schooling, and Wealth Accumulation," NBER Working Papers 16452, National Bureau of Economic Research, Inc.
    12. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    13. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy and Retirement Planning in the United States," NBER Working Papers 17108, National Bureau of Economic Research, Inc.
    14. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
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    Cited by:
    1. Annamaria Lusardi & Olivia S. Mitchell, 2013. "Older Adult Debt and Financial Frailty," Working Papers wp291, University of Michigan, Michigan Retirement Research Center.

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