22 July 2022

Users of high-cost loans have personality traits in common


High-cost consumer loans are controversial and the subject of much debate. But who typically takes out such loans – and what is the money used for? Economist Emil Toft Hansen has investigated the matter.

Photo: CafeCredit.com - Flickr
Photo: CafeCredit.com - Flickr

It is not without reason that high-cost consumer loans are often accused of doing more harm than good. There are examples where the costs of these payday loans have been as high as 1,000% annually.

Critics argue that the high costs of payday loans are opaque and that lenders take advantage of consumers with poor self-control. The proponents argue that the quick loans benefit people who have a sudden, temporary need for extra money.

Used for gambling and impulse buying

Emil Toft Hansen, PhD student at the Department of Economics, has investigated whether sudden events really drive the demand for quick loans, or whether the loans rather attract certain types of people. He finds nothing to suggest that the typical payday loan is affected by unexpected expenses at the time of the loan.

"Some borrowers suffer from a sudden drop in income, but they are too few to explain the total demand for these loans. On the other hand, I find evidence that points to borrowers' personality traits as decisive for loan demand," explains Emil Toft Hansen, who is associated with CEBI - Center for Economic Behavior and Inequality.

Users of high-cost loans appear to be significantly more present-biased than other consumers.

"They generally spend more than they earn, they tend to spend large sums on gambling and they appear to be considerably more present-biased than the average consumer," explains Emil Toft Hansen.

Self-control is low

For the study, Emil Toft Hansen used high-quality transaction data from Danske Bank, which has more than a quarter of the adult Danish population as customers. Based on Danske Bank's data, the PhD researcher has gained a detailed insight into the customers' income, consumption, liquidity and, most importantly, the use of fast, expensive consumer loans. 

"There is a clear tendency for quick borrowers' expenses to rise significantly around the time of taking out the loan. Quick loans are typically used to finance impulse purchases and gambling debts - they worsen and prolong credit-financed overconsumption," assesses Emil Toft Hansen.

Overall, the results suggest that the typical payday loaner has low financial self-control. For the same reason, Emil Toft Hansen believes that restricting access to loans is not sufficient if one is to seriously help the Danes who tend to drown in consumer debt.

"Ideally, one should aim to reduce the behavioral biases among consumers – by strengthening their financial knowledge or giving them tools to help monitor their spending and gain more self-control,” he concludes.

Read the entire study here.


Emil Toft Hansen
PhD fellow, Department of Economics
Mail: eth@econ.ku.dk 
Phone: +45 35 32 40 85

Simon Knokgaard Halskov
Press and communications advisor
Mail: sih@samf.ku.dk
Phone: +45 93 56 53 29


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