Young Borrowers Research Articles

Blood Money: Selling Plasma to Avoid High-Interest Loans

Abstract Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the U.S. blood plasma industry to shed light on the sellers of plasma. Sellers tend to be young and liquidity-constrained with low incomes and limited access to traditional credit. Plasma centers absorb demand for nontraditional credit. After a plasma center opens nearby, demand for payday loans falls by over 13% among young borrowers. Meanwhile, foot traffic increases by over 4% at nearby stores, suggesting that constrained households use plasma markets to smooth consumption without appealing to high-cost debt.

Proposal for calculating regulatory capital requirements for reverse mortgages

In the current context in which many people worry about the sustainability of pension systems, reverse mortgages are gaining popularity because they are a way to supplement elderly people's incomes. However, it is necessary to provide banks with an adequate risk measurement and management procedure for reverse mortgages to increase the commercialization of these products, which will result in greater well-being for the retirement age population. In this paper, we propose a method to measure risk and estimate the regulatory capital requirements for a portfolio of reverse mortgages owned by a financial institution according to Basel II and III. The method considers house price risk, mortality risk and interest rate risk; consequently, regulatory capital requirements need to be computed using a Monte Carlo simulation procedure. The proposed method is general and can accommodate several scenarios for reverse mortgage specifications, including fixed or variable mortgage rates and different income stream schemes (with the lump sum as a particular case). The results for the U.K. show that reverse mortgage providers face higher risk when the lender initially advances a higher amount, with the lump-sum case indicating the highest risk, for relatively younger borrowers, the female population, higher interest rates and floating mortgage rates.

Young Borrowers' Usage of Cosigned Credit Cards and Long Run Outcomes

In the United States, access to credit is an important channel for smoothing consumption and building wealth. However, establishing and building a credit history can take time. Parents may be able to help their children build credit early and ensure good credit behavior, such as paying on time, by being a cosigner on a credit card.

Help When You Need It: Sources of Advice for Student Loan Borrowers Across the Life Course

To promote the financial capabilities of student loan borrowers, practitioners must understand the experiences and needs of borrowers across the life course. A national survey ( n = 1,874) conducted by MIT AgeLab explored perceived loan-related effects across the life course and sources of advice for borrowers. Across age groups, repaying student loans had most regularly imposed negative perceived effects on multiple domains of borrowers’ financial well-being. Younger borrowers reported more negative perceived effects of loans across domains, whereas older borrowers reported fewer negative perceived effects. Few participants had sought professional advice about student loan repayment, although younger borrowers were more likely to have sought loan-related advice in general; perceived levels of helpfulness of advice and comfort consulting with contacts were mixed. Financial social work is uniquely situated to act as a resource for multiple generations of student loan borrowers and their families.

The impacts of emotions and personality on borrowers’ abilities to manage their debts

This paper examines the impacts of retail borrowers’ emotions and personality traits on their abilities to engage in appropriate responses when things unexpectedly go wrong and they get into debt repayment difficulties. We establish several scenarios where borrowers are hit with unforeseen circumstances that affect their abilities to make their loan payments and we classify and evaluate the riskiness of the strategies they state that they would adopt in those situations. Via an extensive on-line survey conducted in the UK, we show that borrowers who were most comfortable about taking on debts in the first place, those who show neurotic tendencies, and those who believe that they have control over events rather than being controlled by them, are more likely to undertake high risk strategies when faced with unforeseen issues that affect their ability to meet their debt interest and repayment costs. We also find that respondents who identify as feeling excited, alert or guilty, as well as younger borrowers and those who are single or renters, are more likely to opt for risky approaches. Our findings have potentially important implications for lenders, regulators and debt counselling services regarding the types of people who are most likely to get into debt troubles.

Blood Money: The Financial Implications of Plasma Sales for Individuals and Non-Bank Lenders

In the United States, households donate plasma for compensation at a higher rate than they use payday, auto-title, rent-to-own, or pawn loans. Our paper is the first to explore the financial implications for households of plasma donation. Plasma donors tend to be younger and less educated with lower incomes and credit scores; they are also more reliant on non-bank credit. We use dramatic growth in plasma centers between 2014 and 2021 to study the causal effect of the ability to donate plasma on non-bank credit. We find that access to a plasma donation center reduces demand (inquiries) for payday and installment loans by 6.5% and 8.1%, respectively, with larger effects (13.1% and 15.7%, respectively) on younger borrowers. Moreover, foot traffic increases by 7-10% at essential and non-essential goods establishments when a new plasma center opens nearby. Our findings suggest that plasma donation helps households smooth consumption without appealing to high-cost debt.

Reverse Mortgage Risks. Time Evolution of VaR in Lump-Sum Solutions

In this study, we analyzed the risk faced by the reverse mortgage provider in the case of the lump-sum solution, which is increasingly becoming one of the most popular types of reverse mortgages. The risk faced by the mortgage provider was estimated by means of a value at risk (VaR) procedure that involves a Monte Carlo simulation method and an ARMA-EGARCH assumption for modeling house price returns in the United Kingdom from 1952 to 2019. The results showed that the reverse mortgage provider faced higher risk and consequently needed to allocate more funds to meet its regulatory capital requirements in the case of relatively young borrowers, especially when they reached their life expectancy and had high roll-up rates. The risk was even higher in the case of the female population. Furthermore, care must be taken when the rental yield rate is higher than the risk-free rate, as is currently the case, as the value of the no-negative-equity guarantee (NNEG) is relatively high and results in higher value at risk (VaR) and expected shortfall (ES) values. These results have important implications in terms of policy decision making when determining the countercyclical buffer for reverse mortgages in Basel III, as well as from a managerial perspective when determining the economic capital needed to support the risk taken by the lender.

The Impacts of Emotions and Personality on Investors’ Abilities to Manage Their Debts

This paper examines the impacts of retail borrowers’ emotions and personality traits on their abilities to engage in appropriate responses when things unexpectedly go wrong and they get into debt repayment difficulties. We establish several scenarios where borrowers are hit with unforeseen circumstances that affect their abilities to make their loan payments and we classify and evaluate the riskiness of the strategies they state that they would adopt in those situations. Via an extensive on-line survey conducted in the UK, we show that borrowers who were most comfortable about taking on debts in the first place, those who show neurotic tendencies, and those who believe that they have control over events rather than being controlled by them, are more likely to undertake high risk strategies when faced with unforeseen issues that affect their ability to meet their debt interest and repayment costs. We also find that respondents who identify as feeling excited, alert or guilty, as well as younger borrowers and those who are single or renters, are more likely to opt for risky approaches. Our findings have potentially important implications for lenders, regulators and debt counselling services regarding the types of people who are most likely to get into debt troubles.

Why mandate young borrowers to contribute to their retirement accounts?

Many countries, in an effort to address the problem that many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, the natural borrowers, to save for retirement. Further, present-biased agents disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counterintuitively, that even though the young responds by borrowing more, that too at a rate higher than offered by pension savings, their lifetime utility increases.

NAVIGATING FINANCIAL CONVERSATIONS ABOUT STUDENT LOAN DEBT AMONG OLDER BORROWERS AND THEIR FAMILIES

Currently, approximately 44 million people in the United States carry the weight of over 1.4 trillion dollars of student loan debt. As the cost of education continues to rise, the decision of taking on student loans is increasingly a family decision rather than an individual one. While the majority of research focuses on younger borrowers, little research has been done to understand the experiences of parents and grandparents taking on student loans for a loved one. In order to financially and emotionally manage this burden, borrowers may benefit from support from their social networks, including family and friends. For many, navigating these difficult conversations presents a challenge of its own. This presentation will spotlight an MIT AgeLab mixed methods study about how student loan borrowers between the ages of 51 and 75 experience and manage their student loans within family systems and how these loans may impact family dynamics. Data were collected through focus groups and a national survey. Preliminary findings suggest that older borrowers demonstrate several distinct communication typologies within their families in regards to finances, particularly regarding student loan accrual and repayment. Each of the four primary communication styles regarding loans impact borrowers’ financial and emotional wellbeing throughout the life course, as well as perceived relationship dynamics. Moreover, older borrowers are more likely to report family conflict if student loans are less frequently discussed with family members. Findings also suggest strategies to help parents and grandparents facilitate conversations abound student loans based on their unique family communication styles.

The Graying of American Debt

Between 2003 and 2015, real aggregate debt in the hands of Americans aged 50 to 80 increased by 59 percent. Meanwhile, real debt held by Americans in their twenties and thirties was approximately flat. Using data from the Federal Reserve Bank of New York’s Consumer Credit Panel, we describe the extent of this debt increase and the distribution of debt growth by loan type. Real per capita home-secured debts held by older consumers show the steepest growth, though older borrowers have increased their obligations in all major debt categories. For long-held debts, these developments lead us to ask how such changes emerged: did older borrowers carry more debt through the Great Recession, after which access to consumer credit declined for new borrowers of all ages? Alternatively, have loan originations since the Great Recession favored older over younger borrowers? While our results indicate that the stock of long-held, home-secured debt sits largely with older borrowers, we also uncover evidence of a decisive tilt of new auto and mortgage originations away from younger borrowers and toward borrowers in their fifties, sixties, and even seventies. The motivation behind older consumers’ substantial new borrowing, often with long repayment terms, is the focus of ongoing research.

Proximity, information, and loan pricing in internal capital markets: Evidence from China

We examine the effect of geographic proximity on loan pricing in internal capital markets by focusing on the role of information. Using a hand-collected dataset on entrusted loans within business groups in China, we find that loan prices are positively associated with the distance between borrowers and lenders, which suggests that a reduction in distance facilitates the monitoring of borrowers and gathering of soft information by lenders. Results remain unchanged after controlling for potential endogeneity. Our findings are further pronounced (1) for lenders with headquarters that are time constrained; (2) during the early years of our sample period, when the Internet and transportation infrastructure were less developed; and (3) for borrowers for whom information uncertainty is likely to be substantial and soft information is likely to be valuable, such as young borrowers and borrowers in different industries to lenders. This paper sheds new light on the role of geographic proximity in intra-group loans within business groups.

Implementing innovative financial models in different cultures

PurposeThe purpose of this paper is to present evidence about cultural differences between Mexico and China, and analyze their significance when implementing an innovative financial model. Specifically, the authors analyzed the case of the Yunus model (or Grameen model), originally developed in Bangladesh and further implemented in China and Mexico.Design/methodology/approachThis paper uses a comparative quantity study to test the cultural difference which affects the innovative financial model implementation. A materialism and credit overuse value scale (Ponchio and Aranha, 2008; Richins, 2011; Roberts and Jones, 2001) is applied to analyze cultural differences with a sample of 250 people in each country.FindingsThe results show that the survey responses are statistically significantly different in these two countries. The Mexican sample shows a greater affinity with luxury and bragging. The Chinese sample shows more responsibility toward credit. Recommendations for the implementation of the innovative financial model considering cultural differences are suggested.Practical implicationsBased on the survey results, gender equality, greater caution with young borrowers, financial education programs, and strict liability agreements to ensure credit repayment, especially for Mexico, are suggested, with the aim of enabling microfinance institutions to increase the successful implementation of the Yunus model in China and Mexico.Originality/valueThere are few existing cultural comparisons between China and Mexico. Therefore, one of the relevant contributions of this work is to shed light on the cultural differences of these two important emerging economies for future research. Additionally, the authors applied a materialism and credit overuse value scale developed to assess consumer behavior as a proxy for culture. The results are relevant for further usage of this scale as a tool to help adapt innovative financial models for application in other cultures.

Credit risk estimate using internal explicit knowledge

Jordanian banks traditionally use a set of indicators, based on their internal explicit knowledge to examine the credit risk caused by default loans of individual borrowers. The banks are reliant on the personal and financial information of the borrowers, obtained by knowing them, often referred as internal explicit knowledge. Internal explicit knowledge characterizes both financial and non-financial indicators of individual borrowers, such as; loan amount, educational level, occupation, income, marital status, age, and gender. The authors studied 2755 default or non-performing personal loan profiles obtained from Jordanian Banks over a period of 1999 to 2014. The results show that low earning unemployed borrowers are very likely to default and contribute to non-performing loans by increasing the chances of credit risk. In addition, it is found that the unmarried, younger borrowers and moderate loan amount increase the probability of non-performing loans. On the contrary, borrowers employed in private sector and at least educated to a degree level are most likely to mitigate the credit risk. The study suggests improving the decision making process of Jordanian banks by making it more quantitative and dependable, instead of using only subjective or judgemental based understanding of borrowers.

Why Mandate Young Borrowers to Contribute to Their Retirement Accounts?

Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counterintuitively, that even though the young responds by borrowing more that too at a rate higher than offered by pension savings, their life-time utility increases.

A Trillion-Dollar Question: What Predicts Student Loan Delinquencies?

The recent significant increase in student loan delinquencies has generated interest in understanding the key factors predicting the non-performance of these loans. However, despite the large size of the student loan market, existing analyses have been limited by lack of data. This paper studies predictors of student loan delinquencies using a nationally representative panel data set that anonymously combines individual credit bureau records with Federal Pell Grant and federal student loan recipient information, records on college enrollment, graduation and major, and school characteristics. We show that borrower-level credit characteristics are important predictors of student loan delinquencies. In particular, credit scores of young borrowers are highly predictive of future student loan delinquencies, even when measured well before borrowers enter repayment. In marked contrast, our results point to only a limited power of student debt levels in predicting future student loan credit events. Our findings have potentially useful practical implications. For example, access to credit file information when borrowers exit school could help to more effectively target student loan borrowers who might benefit from enrolling in income-driven repayment or loan modification plans.

The CARD Act and Young Borrowers: The Effects and the Affected

We study a new law that restricts credit to individuals under age 21. We first use a difference‐in‐difference approach to estimate the effect of the law on credit card availability. Following the passage of the law, individuals under age 21 are 8 percentage points (15%) less likely to have a credit card, have fewer cards, and, conditional on having a card at all, are 35% more likely to have a cosigned card. We then use data from before the passage of the law to identify the characteristics of those individuals most likely to be affected by the Act.

A Trillion Dollar Question: What Predicts Student Loan Delinquencies?

The recent significant increase in student loan delinquencies has generated interest in understanding the key factors predicting the non-performance of these loans. However, despite the large size of the student loan market, existing analyses have been limited by data. This paper studies predictors of student loan delinquencies using a nationally representative panel dataset that anonymously combines individual credit bureau records with Pell Grant and Federal student loan recipient information, records on college enrollment, graduation and major, and school characteristics. We show that borrower-level credit characteristics are important predictors of student loan delinquencies. In particular, credit scores of young borrowers are highly predictive of future student loan delinquencies, even when measured well before borrowers enter repayment. In marked contrast, our results point to only a limited power of student debt levels in predicting future student loan credit events. Our findings have potentially useful practical implications. For example, access to credit file information when borrowers exit school could help to more effectively target student loan borrowers who might benefit from enrolling in income-driven repayment or loan modification plans.

Implementing Innovative Financial Models in Different Cultures: A Comparative Analysis of China and Mexico

Purpose - The paper presents evidence about cultural differences between Mexico and China and analyze their significance when implementing an innovative financial model. Specifically, we analyzed the case of the Yunus model (or Grameen model), originally developed in Bangladesh and further implemented in China and Mexico. Design/Methodology/Approach - This paper uses a comparative quantity study to test the cultural difference which affects the innovative financial model implementation. A materialism and credit overuse value scale (Ponchio and Aranha, 2008; Richins, 2011; Roberts and Jones, 2001) is applied to analyze cultural differences with a sample of 250 people in each country. Findings - Results show that the survey responses are statistically significantly different in these two countries. The Mexican sample shows a greater affinity with luxury and bragging. The Chinese sample shows more responsibility towards credit. Recommendations for the implementation of the innovative financial model considering cultural differences are suggested. Practical Implications - Based on the survey results, gender equality, greater caution with young borrowers, financial education programs and strict liability agreements to ensure credit repayment, especially for Mexico, are suggested, with the aim of enabling Micro Finance Institutions (MFIs) to increase the successful implementation of the Yunus model in China and Mexico. Originality/value - There are few existing cultural comparisons between China and Mexico. Therefore, one of the relevant contributions of this work is to shed light on the cultural differences of these two important emerging economies for future research. Additionally, we applied a materialism and credit overuse value scale developed to assess consumer behavior as a proxy for culture. The results are relevant for further usage of this scale as a tool to help adapt innovative financial models for application in other cultures.

Competition against common sense

Purpose – The purpose of this paper is to provide insights into peer-to-peer (P2P) lending which has served as one important tool to mitigate financial exclusion. The main proposition of this research is that P2P platforms, which in many ways resemble auctions, naturally instill competitive mindset among lenders; furthermore, given only limited objective decision criteria, certain borrower personal characteristics fuel interpersonal competition enough to impact lending decisions in suboptimal ways. The two experiments support this proposition. As the result, while P2P lending offers unprecedented financial opportunities to some consumer groups, it may unintentionally exclude others, and even pose threat to the financial well-being of lenders. Design/methodology/approach – Two experiments were used to collect data and are reported here. Rigorous pretesting of manipulation stimuli preceded a pilot (exploratory) and the main experiment. Findings – The authors generally find a significant age bias, where ceteris paribus, younger borrowers are offered lower loan amounts as lenders most likely infer greater risk and lower likelihood to repay loans on time. However, and perhaps more interestingly, when age is not a strong indicator of experience (as in the case with 30 something), the authors repeatedly find evidence of lending decisions driven by interpersonal competition: more attractive and financially successful loan applicants of the same gender as lenders are most likely perceived as a personal threat, decreasing lenders’ confidence, which subsequently results in lower amounts being invested into loans that are possibly the most promising. Originality/value – To the best knowledge, this research is first to demonstrate the impact of interpersonal competition on decision making in the context of P2P lending. Furthermore, this paper contributes to better understanding of P2P lending as a tool to allay financial exclusion, while raising concerns of possible unintended exclusion of certain consumer segments due to the competitive nature of P2P platforms.