Researchers at WCU, CCU investigate pitfalls of alternative financing methods in the Carolinas

A study conducted by an assistant professor of finance at Western Carolina University and a colleague at Coastal Carolina University indicates that residents of North Carolina and South Carolina are more likely to utilize pawn shops and rent-to-own stores as sources of short-term financing compared to residents of other states.

The study by Gary M. Curnutt, assistant professor of finance in the College of Business at WCU, and Blain Pearson, assistant professor of finance at Coastal Carolina, also reveals that North and South Carolina residents are less likely to use payday loans to meet their short-term financing needs.

Curnutt and Pearson have written a paper about their research titled “Short-Term Financing Usage: A Comparison of the Carolinas to the U.S.” It is currently under review for publication by the Coastal Business Journal.

Their project uses data from the National Financial Capability Study to examine short-term financing options usage by residents of the Carolinas in comparison to usage by residents in other states. They analyzed several short-term financing possibilities including auto title loans, payday loans, tax refund advances, pawn shops and rent-to-own stores.

In addition to finding that North and South Carolina residents tend to turn to pawn shops and rent-to-own stores more frequently while less often seeking payday loans, Curnutt and Pearson observed no statistically significant differences between the Carolinas and other states in terms of residents’ usage of auto title loans and tax refund advances.

Their study began as an exploration of socioeconomic factors in the larger Appalachian region before being narrowed to a look at alternative financial services in the states that are home to the universities where Curnutt and Pearson teach.

“Our original research question was formed with a hypothesis based off the socioeconomic demographics in Appalachia, but the study was intended to be exploratory in nature,” Curnutt said. “We expected to see higher levels of financial literacy and lower use of alternative financial services closer to major financial hubs like Charolette.”

After looking at ZIP code-level data to test their initial hypothesis, the researchers decided to switch their focus.

“Because my co-author is an assistant professor of finance at Coastal Carolina University in South Carolina and I am in North Carolina, we wanted to see if residents of the Carolinas differentiated from residents in the other 48 U.S. states,” Curnutt said. “My co-author grew up in Western North Carolina and the region of Appalachia and introduced me to this very interesting regulatory issue.”

The topic of alternative financial services is growing in importance as larger numbers of Americans turn to them to help make ends meet during difficult economic times, Curnutt said.

“Consumer-oriented short-term financing solutions tend to be more detrimental to financial well-being than other solutions. For instance, subprime short-term financing solutions, such as auto title loans, payday loans, tax refund advances, pawn shops and rent-to-own stores, are associated with higher interest rates and longer repayment periods, both of which increase the financial burden on consumers of these services,” he said.

“While several factors affect the utilization of those services, more conventional financing solutions are often categorically eliminated for consumers with zero or poor credit history. These consumers are often referred to as the ‘unbanked’ or ‘underbanked’ and tend to be younger, non-White and less financially sophisticated and tend to have lower incomes,” he said.

Curnutt and Pearson said they believe their research may be useful to elected officials in North and South Carolina, which have already taken some legislative steps toward price caps, prohibitions and other regulations regarding alternative financing services.

For example, in North Carolina, “small loans” are limited to $500 and annual percentage rates cannot exceed 36%, the researchers said. South Carolina has a similar restriction on dollar amounts of payday loans, at $550, but annual percentage rates can be much higher and, in some cases, can reach nearly 400% when annualized, they said. North Carolina has also banned the practice of title loans.

“However, in what effectively becomes a game of regulatory whack-a-mole, restricting or outlawing one short-term financing market may cause consumers to seek other short-term financing markets for solutions, some of which may have characteristics with worse consequences for financial well-being,” Curnutt said.

“These findings could have implications for further policy development and the promotion of financial literacy in North and South Carolina,” he said. “Many consumers of alternative financing services are financially unsophisticated, and financial literacy improvements should underscore the pitfalls of their utilization by consumers.”

In addition, both North and South Carolina have mandated financial literacy requirements in their public schools, he said, and future research would benefit residents of these states by exploring the effects on the utilization of predatory financing methods and other financial outcomes.