Why the Poor Pay More'? Jaana Lähteenmaa, Lecture in Dep. Of Sociology, Autumn 2008 (made together with Minna Autio and Risto Kaartinen)

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1 Why the Poor Pay More'? Jaana Lähteenmaa, Lecture in Dep. Of Sociology, Autumn 2008 (made together with Minna Autio and Risto Kaartinen)

2 Focus of the study a new form of consumer credit cash advances & payday loans pikavippi in Finnish = fast loan credit card credit and the mortgage stock doubled in Finland, the use of cash advances has also started consumptive debt (Calder 1999) low-income households are using cash advances "the poor pay more" (Caplovitz 1963) higher commission and interest than normal loans (e.g. mortgage, credit card), yearly interest % a self-sustaining culture of indebtedness? (Lea, Webley and Levine 1993)

1999) low-income households are using cash advances "the poor pay more" (Caplovitz 1963) higher commission and interest than

3 Cash advances in Finland result of information and communication technology (ICT) 'revolution earlier instalment plans, bills of exchange, pawnbrokers, borrowing from friends and relatives etc. ref. credit cards provided by internet-banking and mobile phone services young people are taking loans by mobile phone usually euros [low income] 100 euro is 120 or 125 two weeks later - risk a circle of debt

credit cards provided by internet-banking and mobile phone services young people are taking loans by

4 Studies of consumer credit plenty of research done on credit card debt including on young people (e.g. Faber & O'Guinn 1988, Lea et al. 1995, Warwick & Mansfield 2000) consumers views/attitudes on the advantages and disadvantages of cash advances have not been studied before in Finland focus: year-old Finnish consumers use of cash advances and other consumer credit services "young consumers in danger" hypothesis

1995, Warwick & Mansfield 2000) consumers views/attitudes on the advantages and disadvantages of cash

5 Data and methods open online survey in October 2006 use of credit: a credit card, a mortgage, a student loan, an instalment loan, cash advances - use of cash advances (also an open-ended question) attitudes towards borrowing and self comprehension as a consumer data: 1610 respondents, the open-ended question 179 respondents not representative direct and a chi-square distribution content analysis

question) attitudes towards borrowing and self comprehension as a consumer data: 1610 respondents,

6 Three groups: "no credit users, consumer credit users and cash advance users Complete data (n=1610) Consumers who have no consumer credit 748 Consumers who have other types of credit than cash advances 443 Consumers who have cash advances, but may in addition have other types of credit

no consumer credit 748 Consumers who have other types of credit than cash

7 Use of cash advances essentials costs and pleasurable consumption Partying Beer, wine, tobacco etc. Food Credit and Interest charges Traffic expenditures Mobile phone bills Clothes, footwear Leisure time activities Rent Travelling

Food Credit and Interest charges Traffic expenditures Mobile phone

8 Credit for low-income consumers use of cash advances only once 17 percent, 2-3 times 26% a half of the respondents 4-5 times or more risk groups unemployed, marginal position in the labour market, single parents and an income of less than 1500 euros per month, years "poor consumers" use cash advances for food, partying, paying other debts, and interests and traffic expenses

market, single parents and an income of less than 1500 euros per month, 18 23 years "poor

9 Cash advances make life 'easier' When you re penniless and can t borrow from friends or family, you need a cash advance. As mother of two young children I need to make sure the kids are fed and that the younger one has diapers. I do always try to economise as much as possible so I wouldn t have to get a cash advance, the 20 extra euros when paying back hurt! - 24-year-old mother, two children I usually get a cash advance to pay some big bill. I calculate whether it s more profitable to get a cash advance or the late payment interest. Sometimes I have more than one bill overdue. Now I work while I study it s different year old man -

I do always try to economise as much as possible so I wouldn t have to get a cash advance, the 20 extra euros when paying back hurt!

10 Financial literacy skills I am a sensible consumer, I never buy useless goods and services (n=1579) Agree/strongly agree Disagree/strogly disagree 10 0 "Cash advances users" "Consumer credit users" No credit Neither agree nor disagree

39 32 13 13 14 Agree/strongly agree Disagree/strogly disagree 10 0

11 Lack of money management skills? I am unable to handle money: as soon as it came, it went (n=1577) Agree/strongly agree Disagree/strogly disagree "Cash advances users" "Consumer credit users" No credit Neither agree nor disagree

73 70 60 50 40 47 46 38 56 Agree/strongly agree 30 20 18

12 "The worst case scenario" Low income and lack of control cash advance users recognize the recklessness in their spending (also Faber & O'Guinn 1988) 31 % of them pay bills already overdue sense of time is different from sensible consumers (Fan 2000, Norum 2008, Autio 2006) "everything was spent immediately" cash advance users: no sense or will in calculating the costs of a cash advance according to annual interest over the time they pay a lot of commissions and interests "the poor pay more" exists in some extent

2008, Autio 2006) "everything was spent immediately" cash advance users: no sense or will in calculating the costs of a cash

13 Conclusion cash advances: necessities (living costs) and pleasurable consumption poorer for both, well-off youngsters for pleasurable consumption young adults use cash advances as a substitute for a credit card risk groups "young consumers in danger" low-income, unemployed, years, and in a marginal position in the labour market and/or a single parent half of the respondents have used cash advances 4-5 times or more a debt circle?

groups "young consumers in danger" low-income, unemployed, 18 23 years, and in a marginal position in the

14 References Autio, Minna (2006) The Construction of Consumerism in Young People's Narratives (in Finnish). The Finnish Literature Society, Finnish Youth Research Society and Youth Research Network. Helsinki. Calder, Lendol (1999) Financing the American Dream A Cultural History of Consumer Credit. Princeton University Press. New Jersey. Caplovitz, David (1963) The Poor Pay More Consumer Practices of Lowincome Families. New York. Free Press. Fan, Jessie X. (2000) Linking Consumer Debt and Consumer Expenditures: Do Borrowers Spend Money Differently? Family and Consumer Sciences Research Journal 28 (3), Faber, Ronald J. & O'Guinn, Thomas C. (1988) Compulsive consumption and credit abuse. Journal of Consumer Policy 11 (1),

Calder, Lendol (1999) Financing the American Dream A Cultural History of Consumer Credit. Princeton University Press. New Jersey.

15 Kaartinen, Risto & Lähteenmaa, Jaana (2006): Miten ja mihin nuoret käyttävät pikavippejä ja muita kulutusluottoja?ktm, rahoitetut tutkimukset 10/2006, Helsinki.. Lea, Stephen E.G, Webley, Paul & Levine, Mark, R (1993) The economic psychology of consumer debt. Journal of Economic Psychology 14 (1), Norum, Pamela S. (2008) The role of time preference and credit card usage in compulsive buying behaviour. International Journal of Consumer Studies 32 (3), Peñaloza, Lisa (2008) Capitalism: Mapping Interrelations between Credit and Consumption for the White U.S. Middle Class. A keynote speech at the annual spring seminar of the Finnish Association for Consumer Research, on Friday the 23 rd of May Helsinki School of Economics.

(2008) The role of time preference and credit card usage in compulsive buying behaviour. International Journal of Consumer Studies 32 (3), 269 275.

New Poll Shows African Americans and Hispanics Particularly Concerned About Growing Consumer Indebtedness and Eager for Government Solutions

New Poll Shows African Americans and Hispanics Particularly Concerned About Growing Consumer Indebtedness and Eager for Government Solutions New Poll Shows and Particularly Concerned About Growing Consumer Indebtedness and Eager for Government Solutions A bipartisan poll of 1,000 adults on public attitudes toward consumer debt was conducted