Abstract
AbstractPast literature has explored the characteristics of individuals who use high‐interest and tax‐inefficient consumer debt products, such as carrying a monthly credit card balance and engaging with alternative financial services. That literature revealed that users of these debt products tended to be financially constrained households faced with an immediate liquidity need, and that they had lower levels of financial literacy. Much less is known, however, about the role financial literacy may play when a more advantageous solution may be available but not used—an example of which is securities‐based loans, which offer lower rates and potential tax preferences. Therefore, this study used the 2018 National Financial Capability Study to examine why investors use traditional debt products when they could likely have qualified for a securities‐based loan. Using bounded rationality as a theoretical framework, this research advances the literature in consumer debt and borrowing decisions. The results found that objective knowledge, as opposed to self‐assessed ability or confidence, explained the use of optimal debt products. Additionally, advisor engagement was positively associated with securities‐based loan use.
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