Are Icelandic consumers of payday loans financially illiterate?

Abstract

Considerable discussion has taken place in Iceland regarding firms offering small loans such as payday loans or microfinance loans. On one side people view these loans as adding to the choice of financial products available to consumers, while on the other side these loans are often viewed as loansharking as the annual interest rate is high. However, very little of this discussion has taken place in the Icelandic academic community and as a result no research has been conducted on this market. In this paper we investigate whether consumers of these small loans are less financially literate than the general population. We find that these consumers are less financially literate than the general population. They are also younger, more likely to be male, with less income and lower education.