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.
Highlights
Many average consumers feel overwhelmed and have limited understanding of the way the modern financial system works, including investments, mortgages, insurance, and various loan types, they engage in financial market transactions daily
Based on the transformative consumer research (TCR) approach and the ecological systemic theory (EST), we explored the influential factors related to payday loan use and assumed that the following factors in multiple systems that include unobserved characteristics would be associated with consumer choice in credit market: financial knowledge and consumer credit-related characteristics
This study assumed that financial knowledge and the perceived credit score would serve as the initial resources, while credit-card payment problems and having emergency funds would play the role of throughput factors in the relationship based on the TCR approach and the EST
Summary
Many average consumers feel overwhelmed and have limited understanding of the way the modern financial system works, including investments, mortgages, insurance, and various loan types, they engage in financial market transactions daily. Some economists argued that the highly complex financial market structure and processes, in which numerous daily transactions occur without decision-makers clearly understanding their transactions’ exact consequences, cause this limited understanding (e.g., Atkinson and Morelli 2011; Cardaci 2018; Chang 2014; Madrick 2014; Stiglitz 2012). Those economists insisted that the financial market system evolved to increase profit and is an interdependent and complex system in which individual consumers’ participation and roles are fairly limited. The Financial Industry Regulatory Authority (2018) found that over half of Americans have low levels of financial knowledge, and Lusardi and Tufano (2015) found that only one-third understand compounding interest or the way in which credit cards work, measured as their debt literacy level
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