The study
This rapid evidence review critically assessed the evidence about the relationship between borrowing and financial wellbeing. The researchers looked at what the evidence told them about personal and external factors that influenced borrowing behaviour and what factors protected against poor borrowing or repayment behaviour.
The evidence review identified 375 items: 310 academic papers and 65 pieces of ‘grey literature’. From this, a structured, critical analysis was conducted of 149 relevant items.
A summary of the strength and quality of evidence was also provided, along with any evidence gaps identified. Overall, the evidence was deemed to be of high quality, with the most relevant evidence related to the socio-economic and psychological factors that shape people’s borrowing behaviour.
Areas deemed to be of higher priority for future research were ‘young people, gender and ethnicity’ and ‘the effect of technology on borrowing behaviour.’
Key findings
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Income strongly influences borrowing behaviour. Low-income households are less likely to use consumer credit than those on higher incomes, but more likely to use high-cost lenders when they do borrow, often to make ends meet.
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Owning assets has some relation to borrowing behaviour. Homeowners have higher levels of borrowing than non-homeowners; their borrowing is linked to their level of housing assets. However, evidence is lacking on the effects of savings on borrowing.
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There is strong evidence about patterns of age-related borrowing. The evidence shows borrowing increases with age, typically peaking when people are in their 30s and 40s, and then declines. Compared to previous cohorts, young people nowadays borrow more as debt becomes normalised. At the same time, young people are vulnerable to poor borrowing decisions resulting in outcomes such as repayment difficulties and problem debt. There seems to be little evidence about why young people start borrowing; or how and why patterns of borrowing change over the life-cycle.
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Psychological factors shape borrowing behaviour, but not as much as socio-demographics. There are complex interactions between different psychological factors; and one can mediate (and moderate or amplify) the effects of another. Psychological effects seem less powerful in explaining borrowing behaviour than other personal factors, such as income.
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Macro-economic conditions play a major role in shaping people’s financial situations, their access to borrowing and the cost of borrowing. Aggregate consumer borrowing rises when macro-economic conditions are good and falls when they deteriorate. At an organisational level, credit card design and marketing (such as credit limit increases and zero-interest offers) encourage borrowing. Speed, convenience and easy access attract borrowers to use high-cost credit, particularly where they have few other credit choices.
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Lower financial literacy is linked to poor borrowing behaviours and over-indebtedness. There are concerns that young people, with lower financial capability overall, are particularly at risk from poor borrowing decisions. The evidence is weak regarding the impact of financial literacy programmes (which tend to focus on financial knowledge) upon financial behaviour.
Policy implications
Bringing the evidence together, the authors identified five borrowing behaviours associated with good financial wellbeing:
Not needing to borrow to pay for essentials
- The evidence suggests that interventions to promote income adequacy and/or curb excessive living costs (such as housing and utility costs) are likely to have a positive ‘downstream’ impact by reducing the need for lower-income households to borrow for essentials.
Borrowing with restraint and avoiding over-borrowing
- The evidence shows that young people in particular might benefit from advice and support to make good borrowing decisions (including deciding not to borrow). Suggestions included teaching young people personal development tools and developing products that facilitate self-control or circumvent tendencies towards impulsivity. Supply-side interventions should focus on proper affordability checks from lenders and good access to affordable credit.
Keeping on top of debt repayment
- UK banks and credit card firms are now required to do more to identify borrowers in persistent credit card and overdraft debt and help them reduce their borrowing. There may also be a place for psychologically and behaviourally oriented interventions to provide borrowers with advice and support to keep on top of their debt repayment.
Reducing the cost of borrowing
- High borrowing costs are associated with lower financial wellbeing and so there is significant potential benefit (especially for lower-income borrowers) from using regulation to reduce the costs of high-cost credit; and boosting the availability and take-up of affordable credit. To be effective, efforts to deliver affordable credit alternatives should be designed around low-income borrowers’ needs, preferences and behaviours, for example regarding product features.
Recognising and acting on the warning signs of potential problems
- The UK regulator has proposed new rules and guidance for firms to identify borrowers at risk of financial difficulty and to intervene earlier to help them. The growth in personal and transaction data may offer one way to do this, with the potential to use this data to give borrowers feedback and helpful behavioural nudges.
Points to consider
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Methodological strengths/weaknesses: This briefing note is based on the evidence from 149 academic papers and ‘grey’ literature, each assessed for their methodological strengths and weaknesses. Overall, the authors deemed the evidence to be of ‘high quality’ according to their evaluation criteria, which gives credibility to the findings and policy implications discussed. However, the report provides no methodological description on the criteria of selection for research studies and media articles used nor the parameters used to determine the quality of the evidence. A reference list is also not provided in this briefing note.
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Generalisability/ transferability: These findings may not take into account the impact of COVID-19 as it is likely that the financial landscape will have changed considerably for low-income households since publication.
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Relevance: These findings may not take into account the impact of COVID-19 as it is likely that the financial landscape will have changed considerably for low-income households since publication.
