Risk preference, payday loans and other alternative financial services
Abstract
Purpose
The purpose of this paper is to examine how individual risk preference influences the borrowing of payday loans – a prevalent type of cash loan in the USA with exorbitantly high-interest rates. Additionally, this paper tests how risk preference determines other alternative financial services (AFS), including pawn shops, rent-to-own purchases, title loans, etc.
Design/methodology/approach
The author applies Probit and Tobit regressions to test the relationship between individual risk preference and payday borrowing, based on the state-by-state survey data from National Financial Capability Study (NFCS) sponsored by Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.
Findings
Individuals with higher risk tolerance are more likely to borrow payday loans and other AFS, after controlling for financial situation, financial literacy, overconfidence and demographic features.
Originality/value
This paper is the first to study risk preference as an explanation to the high cost and widely used payday loan services in the United States of America. This study provides evidence that these cash loans are determined by inherent human characteristics. The finding provides new insight for the policymakers and regulators in the consumer debt market.
Keywords
Acknowledgements
The author acknowledges the Summer Research Grant from Saint Xavier University in 2021.
Citation
Wang, S. (2023), "Risk preference, payday loans and other alternative financial services", Review of Behavioral Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/RBF-04-2023-0099
Publisher
:Emerald Publishing Limited
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