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Classical and neoclassical economics and their contribution
Classical and neoclassical economics and their contribution
Classical and neoclassical theories of economic
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There are only a few sources of credit for low-income consumers with a high risk of default, such as the payday loan. The payday loan is the type of short-term consumer loan where a consumer borrows a small amount with a one-time fee of 12-18% of the loan principal. While the transaction seems reasonable in isolation, the actual annual interest rate borrowers will face is substantial. This paper will discuss the existence of demand for the payday loan in spite of its significantly high fee in two distinct economic models: the neoclassical model of economics and the behavioral economics. As well, this paper will outline the experiment, which will help to understand possible behavioral economic biases that may alter the usage of payday loans.
Standard economic theory indicates that individuals will only use a payday loan when the costs associated with forgoing the loan are large enough to justify the high rate of interest (Homonoff 2013). While an inexpensive source of credits may be obtainable to many customers, low-income borrowers with the high risk of default may not qualify for these sources of credit. One third of payday loan customers were rejected access to the credit (Logan & Weller 2009), as well as nearly half of payday loan borrowers do not have a credit card (Agarwal et al. 2009). Hence, the less privileged within society do not have the savings or resources to navigate a short-term financial crisis. “When desperate, people will take any deal, no matter how bad, to meet an urgent financial obligation” (Thompson 2013). This statement underlies that the low-income individuals do not have an option to walk away from an unfair deal. These evidences suggest that payday loans charge high interest because there is sufficient...
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...implement randomization of the subjects. In order to assess the external validity, the study ensures the obtainment of the basic information for non-participants to compare their variance.
Standard economic perspective suggests that payday loan is only a choice for some individuals, and may be better off in certain situations in spite of the high fee associated with the loan. The behavioral economic view on the other hand argues that individuals irrationally make a decision to take a payday loan, but this may exhibit from optimistic bias and they falsely believe that they will be able to repay in full upon maturity date. This paper examines whether the optimistic bias and over confidence might alter the usage of a payday loan, by conducting a survey to test their confidence level before taking a payday loan compared with the actual days a consumer takes to repay.
...ancial positions of the borrowers, their lack of knowledge as well as the superior bargaining power of the lender to get the borrowers to agree to these loans. The lenders should bear the major responsibility of these loans, as they are aware of the ramifications of such transactions. The borrowers are also responsible, as they should not enter into contracts without adequately understanding the consequences of such actions. In many cases, the lenders do not provide the information that would assist the borrower in making rational decisions. There are instances when the borrower does not care about the increased penalties, they just want to get their hands on the money, and worry about the consequences later. Some borrowers just live beyond their means but once they get sucked into a predatory loan, they begin a cycle of debt that they just cannot get out of.
One particular minor argument that Scurlock presents in “Maxed Out” is that banks prey on those people who are most likely unable to make payments, are in college, or who have already filed for bankruptcy once, which isn’t ethical. He compares lenders to rattlesnakes and how they, “inflict destroying poison on careless, unwary, and unprotected.” This comparison exhibits to the viewer how problematic and predator like lenders are, and why they have become such a major problem. Also, to illustrate this argument he includes clips of mothers of college students whose children were bombarded with credit card debts and constantly preyed on by the banks. These clips evoke strong emotion because of the utter sadness the mother’s show when revealing that their children both committed suicide to escape the heavy burden and in this section, sorrowful music to accompany the clips as well. Scurlock takes advantage of factual information to convey this minor argument a...
As a native of Texas, Lendol Calder graduated Phi Beta Kappa from the University of Texas at Austin in 1980 and went on to earn his Ph.D. from the University of Chicago in 1993. Calder is currently a Professor of History and African-American Studies at Augustana College and is presently working on an analysis of the thrift ethos in American history and culture with a team of scholars organized by the Templeton Foundation and the Institute for the Advanced Study of American Culture at the University of Virginia. He is a scholar of the history of American consumerism and this interest led him to study the progression of consumer credit in America when little else had been published on the topic. Calder draws from some of his own experience with consumer credit in the form of a department store credit card he and his wife obtained early in their marriage to purchase what he says was “a suite of furniture costing twice as much money as we could have scraped from our bank account.” (p.5) Most of his presumptions, however, were discarded in his explorations of the “peaks and valleys of consumer credit” (p.16) due to the fact that most common sense beliefs about the history of credit are in actuality a myth. In Calder’s Acknowledgments, he gives thanks to his parents for coming to his aid and saving him “from having to do some unwanted personal research into the subject of debt.” (p.xiii)
The article addresses the issue of college debt preventing college graduates from taking out loans on other items such as a car or house. It claims that this statement is false and that within about two years of graduating, students have caught up with their debts enough that they are okay enough to make these purchases. An example used is a study done by TransUnion between two groups; one with college debt and one without. The study results display that the group with student loans ended up have better origin rate percentage with their purchases after two years than the group without
Etzioni explains that working jobs doesn’t teach teens good money habits. First of all, I don’t believe it is McDonald’s job to teach kids how to use their money. One of the biggest advantages to having money at that age is that they can completely mess up and it won’t affect them in a dangerous way. Having money to spend can teach kids to spend their money wisely. The first several times they see something they want they will buy and find out later when it goes on sale that they messed up. Also teens try to borrow money all the time to get what they want quick. Often times they will end up in debt, but lucky for them they’re young enough that their parents can bail them out. If they don’t have the chance to make these mistakes before they move away, the consequences could be much more
Credit cards are something that are almost needed in everyday life now, as most dont have the money available to purchase a car or house and so need credit, thus needing credit cards to help build that credit. Those cards are hard to handle, and receiving applications in the mail daily, and commercials appearing on television don’t seem to make the struggle of staying away any easier. This starts to spark an interest. So people begin to think, "I think I 'm responsible enough to get a credit card, I 'll only use it for emergencies." Then the application process begins and it may take a couple times to finally be approved for one. This only makes it worse, of course, because realizing how long a credit card wasn’t applicable to life, but now
Over the past decade, it has become evident to the students of the United States that in order to attain a well paying job they must seek a higher education. The higher education, usually a college or university, is practically required in order to succeed. To be able to attend these schools and receive a degree in a specific field it means money, and often a lot of it. For students, the need for a degree is strong, but the cost of going to college may stand in the way of a successful future. Each year the expense of college rises, resulting in the need for students to take out loans. Many students expect to immediately get a job after graduation, however, in more recent years the chances for college graduates to get a well paying job isn’t nearly as high as it used to be. Because students can no longer depend on getting a job fresh out of college, it has become harder to repay the loans. Without a steady income, these individuals have gone into debt and frequently default loans. If nothing is done to stop colleges and universities from increasing the cost of attending their school, the amount of time it takes for students to pay off their loans will become longer and longer. The extreme expenses to attend a college or university may leave a student in financial distress: which may ultimately lead to hardship in creating a living for them and affect the country’s economy.
Statistics suggest about 32% of consumers are going to over estimate the rating on their credit, while only around 4% are going to under estimate the rating on their credit. Ones who will overestimate the quality of their credit are most likely less informative about finances overall, and will be more likely to have learned about their financial knowledge, unfortuanately, the hard way. Also the consumers who are going to overestimate the ratings of their credit will be less likely to properly budget, effectevely save their money, or learn to invest it often. With another example, in 1999 it was found that about 40 percent of mortgage borrowers didn't understand what the interest rates that were associated with their loans were.
This is supported by the study of Hakim and Haddad (1999) which found that the loan repayment obligations related to income and are an important factor in the possibility of default.... ... middle of paper ... ... According to the Credit Counselling and Management Agency (CCMA) (2012), the main reasons people fail to pay a debt were poor financial planning (25%), high medical expenses (22%), business failures or slowdowns (15%), loss of control over the usage of credit cards (13%), and loss of jobs or retrenchments (10%). Therefore, Lea, Webley and Walker (1995) found that debt with economic, social and psychological factors are closely related.
An important part of an experiment is random assignment. If the participants for the study are randomly assigned to create two groups, and the researcher has enough participants in the study to have the desired “probabilistic equivalence” (Trochim & Donnelly, 2008, p. 187) then the researcher will feel a sense of confidence that the study will have internal validity in order to assess whether or not the treatment caused the outcome hypothesized. Well-c...
The lack of knowledge plays a big part in the debt young people are getting themselves into. Credit cards are often offered to young adults as soon as they get out of high school. Many take advantage of having a credit card without even thinking about the responsibilities that come with it, instead they think about the things they will be able to buy. In “Generation Debt” the author Tamara Draut says that young people are getting into debt younger than ever before. Two of the reasons that are more costly on young students that hit hard on the budget are car repairs, and travel for students who have families and friends in other states (231). From my experience I know first-hand what it was like to be offered credit cards right out of high school, and I didn’t hesitate to get any of them. I st...
The first and arguably most common effect of poverty on society is its financial impact (Veritta, 2008). In many of the societies that experienced significantly high levels of poverty, debt was increasingly common, and especially debt accrued from moneylenders (Hatcher, 2016). For many individuals living in poverty, access to financial services such as banking is often stifled and rudimentary, making it difficult for such individuals to access self-improvement loans at standard and fair rates (Yoshikawa, Aber, & Beardslee, 2012). For these individuals, moneylenders are the best option available, which results in them paying exorbitant interest rates. The interconnection between poverty and finance, however, is cyclic in nature. The lack of finances or access to financial services causes poverty, which in turn causes an isolation of individuals from finances and financial services (Hickey & du Toit, 2013). This makes poverty a fairly complex problem to
The introduction of the credit card first came around while the economy was booming in the early 1950’s. American consumers were in buy mode and the credit card was a genius idea to let people buy now and pay later. At first look this idea seemed great but what looks and sounds great does not always mean that it is going to be great overall. Over the years credit agencies have released thousands of credit cards with several questionable polices and high interest rates. “Any given American family in the present day possesses an average of eight credit cards with about 15,000 dollars of debt”(Canner 8). Many consumers have become addicted to wasteful cyclic consumption and living beyond their income due to the ownership of credit cards. The invention and continued implementation of credit cards into the American economic and social systems appears to be the cause of the struggling economy, the weakened U.S. dollar, the sky rocketing prices of gas and grocery store goods, the all-time highs of American debt, and social deprivation in some regions.
The phenomenon of impulse buying is becoming increasingly commonplace in developed countries. Our culture of consumption makes us less likely to resist temptation and consider the consequences before purchasing things. The impacts could be varied dramatically depended on where it takes place. For instance, the things that you purchase impulsively could be a bar of chocolate; however, it could also be a Louis Vuitton handbag and the consequences would be much severe. Hence, a lot of researchers are interested in studying the causes of this phenomenon in terms of different parameters such as age and gender. In relation to gender, researchers attempted to find whether there will be a gender difference in impulse buying and the possible
Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional financial institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore, the fundamental problem is not so much of unaffordable terms of loan but rather of the lack of access to credit itself.