Americans have a complicated relationship with debt, one that defies easy analysis. That’s why a pair of researchers from Filene, a credit union think tank, chose to study the subject using ethnographic models.
What is ethnography, you ask? It is an anthropological, interview-based approach to research that eschews statistics and data to better reveal beliefs, feelings and perceptions.
Filene’s report, “The Culture of Borrowing and Debt: An Ethnographic Approach,” set out to tackle two overarching issues: how consumers relate to borrowing and debt, and how financial marketers can respond to those basic borrowing needs. With that in mind, Filene used the following eight questions to guide its research project:
- What are people’s philosophy and attitudes toward money, borrowing, and debt?
- Does the average consumer understand the loan process, from considering whether to borrow, to obtaining a loan and paying it off?
- What is the language consumers use to discuss borrowing and loans?
- What are the influences and influencers around borrowing and taking loans?
- Who do consumers trust in the lending process, and what creates this trust?
- What forms of financial education work and what doesn’t? What can be done to improve consumer understanding of the lending process?
- How do members perceive the value of credit union membership?
- What is the customer lending experience? What works, what doesn’t, and what needs to be changed?
The questions themselves are profound. Every financial marketing executive should be dedicated to finding these answers for their bank or credit union.
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How Do People Approach Borrowing and Lending Today?
Filene’s report outlines a number of conclusions and salient insights that financial marketers will find revealing.
Convenience is king. Consumers will choose the path of least resistance when obtaining loans, even if the deal isn’t as good. For instance, a desire for instant gratification explains why people will jump on dealer financing when buying a new car. It’s critical to make the lending process easy and streamlined. Consumers dislike banking-related chores, and want them to take as little time and energy as possible. Simplify the process and save people’s time if you want to succeed.
“How much do you want your monthly payment to be” is the wrong question to ask consumers. Consumer confusion about lending makes it difficult for people to answer this question. As a result, consumers come up with a figure that doesn’t reflect what they can truly afford. When they get in trouble, they feel as if their financial institution tricked them into a loan for a higher amount and/or longer term than they ever imagined. Many consumers want lenders to take the time to understand what they can truly afford. With some loans like mortgages, consumers need to understand the total cost of the loan, including things like taxes and maintenance.
Selling mortgages is a form of betrayal. Researchers found a high level of frustration among consumers when financial institutions sold their mortgages; it was viewed as a breach of trust, especially when done by a credit union.
Being debt-free can’t buy love. Even consumers with excellent finances and low debt didn’t always report personal satisfaction. Instead, consumers who applied emotional and financial criteria to their borrowing decisions were most likely to report being happy.
Many consumers perceive credit unions as social institutions first and financial institutions second. They often approach a credit union only after being turned down for a loan at another institution. Filene suggests these people need financial counseling as much (if not more) than they need a loan. When dealing with credit unions, consumers expect high-touch and education-based interactions, and underwriting criteria that are more flexible.
The 5 Psychological Profiles of Borrowers
Filene set out to classify the psychology of borrowers. What they found was a diverse group of consumers whose relationship with- and feelings toward borrowing ran from healthy to wholly dysfunctional. Here are the five distinct groups they identified:
1. Intense – Heavy/frequent borrowers with ample ability to repay. Borrowing decisions are tied to emotional/impulsive issues.
2. Analytical – A cold and calculating approach that ignores the emotional benefits to borrowing. These consumers have a strong desire to tightly control their financial situation — even to the point of obsession — but the energy invested into managing financial minutiae might come at the expense of their psychological well-being (e.g., stress, or time spent with family).
3. Balanced – They don’t borrow too often and never more than they can afford, but when they do borrow, it’s for the right reasons — both financial and emotional.
4. Reckless – These folks let their emotions dominate their financial situation. They like to close their eyes, cross their fingers, and hope everything just works out.
5. Vulnerable – People who have an unhealthy emotional relationship to money and lack adequate financial means are in danger of allowing debt to destroy their lives.
People that fall into extremes — those that are overly emotional or excessively analytical in their relationship with their finances — are seldom happy. Consumers who focus too much on the emotional aspects of money are likely to make impractical, impulsive and expensive decisions. And consumers who approach their financial situation from a purely left-brained perspective often overlook the lifestyle benefits of borrowing. In simple terms: Not borrowing enough can make people as unhappy as borrowing too much. Someone who goes through life never taking a loan out might find that they’ve deprived themselves or their family of joys that would be otherwise unfeasible.
As consumers make decisions about borrowing, achieving balance is a critical component to how comfortable and satisfied they feel about their choices, Filene’s researchers note in their report. If a consumer can hit a point of equilibrium between their emotional and the financial drivers — what Filene labels “the golden mean” — he or she is more likely to feel good about the loan and their financial picture overall.
The Emotional Perception of Good Loans vs. Bad Loans
Filene concluded that not all loans are viewed equally by consumers. Attitudes towards various types of loans were determined largely by the amount of emotional and financial “friction” attached to them.
Personal loans, for instance, tend to be for relatively small amounts and are often linked to some sort of past financial mistake and thus were associated with an element of friction. Whether the loan came from a friend or family member or from an institution, people were very committed to paying these back. Personal loans — especially those between private individuals — carry with them a significant amount of emotional weight. Even when there isn’t a rigid repayment schedule, the borrower usually has a plan tries to stick to it. This is what Filene calls “positive friction” — where financial benefits and emotional incentives provide the motivation to manage borrowing responsibly.
Filene says home loans also have a high degree of positive friction attached to them. A mortgage isn’t simply a dry, lifeless financial tool; they help provide comfort, security and happiness to their family — home and hearth. Inasmuch, consumers feel a deeper sense of obligation and emotional attachment to their mortgage.
Surprisingly, auto loans were viewed less favorably. You’d think consumers — particularly those in America where cars are an expression of one’s personality and style — would associate an auto loan as a vehicle to happiness. Not so, according to Filene’s research. Car loans were almost universally disliked and seen as a “necessary evil.” Taking out a loan on something that’s expensive and depreciates immediately frustrates most borrowers.
Student loans are both too easy to get and too easy to avoid paying off. Most student loan borrowers just signed the paperwork without really understanding what they were getting into. Student loan deferral is another big problem for consumers, saddling them with a debt burden that can cause severe stress over many years (sometimes decades). This is bad enough for people who feel their investment in education was worthwhile, but it is downright terrible for those who feel they got a poor return on their education.