Financial Literacy to Prevent Poor Borrowing Choices

Abstract

Working Americans face the new reality of having to fund and manage their retirement while facing rising levels of indebtedness. A basic level of financial knowledge is essential to make good long-term financial decisions. Using the 2015 National Financial Capacity Study, we investigate the impact of financial literacy on the decision to access retirement plan loans before retirement or use one or more high-cost lenders. Our results show that being financially literate reduces the likelihood of using high-cost lenders and using retirement-plan loans. Furthermore, we find evidence of a negative relation between financial literacy and myopic spending. © 2021 Academy of Financial Services. All rights reserved.