Examining the Use of High-Cost Financial Resources over the Course of the COVID-19 Pandemic

Background and Purpose: The COVID-19 pandemic caused the single largest economic shock in recent history. While ample research documents the direct economic impacts of the pandemic, none has focused on the extent to which households are relying on high-cost financial resources—such as payday loans, auto title loans, and account overdrafts—to mitigate COVID-19-related financial losses. To understand the dynamics surrounding the use of high-cost financial resources during the pandemic, this study explores: (1) the prevalence of high-cost financial resource use during the pandemic; (2) the extent to which high-cost financial resource use is caused by the pandemic; (3) how patterns in high-cost financial resource use change over the course of the pandemic; (4) the impact of COVID-19-related job and income losses on the use of high-cost financial resources; and (5) how each of these findings differs based on key household characteristics such as race/ethnicity and income.

Method: This study draws on the longitudinal Socioeconomic Impacts of COVID-19 Survey, which collects five waves of data at three-month intervals beginning in April of 2020 and ending in May of 2021. Each wave contains interviews from approximately 5,000 adults, with roughly 50% or respondents in each wave being re-contacts. Using basic descriptive techniques, we first explore patterns in reported high-cost financial resource usage during COVID-19, as well as the extent to which that usage was caused by COVID-19. Then we use logistic regression analysis to assess the demographic and financial predictors of high-cost financial resource usage. The study also leverages the longitudinal nature of the survey to explore how this usage evolved over the course of the pandemic, and how these patterns differ for those who have experienced COVID-19-related job/income loss. For this approach, we employ random effects regression, which allows us to estimate the relationship for both time-varying variables—such as the experience of COVID-19-related job/income loss—and time-invariant variables—such as the race/ethnicity and gender of the household—and the use of high-cost financial resources.

Results: Households facing COVID-19-related job/income loss are more likely to use high-cost financial resources compared to their counterparts. When looking at specific high-cost financial resources used over the prior three months, the most prominently used resource is over drafting on an account (6%), followed by auto title loans (4%), pawning an item (3%), selling blood plasma (3%), and payday loans (3%). Of these results, approximately 50% of the high-cost financial resource usage was attributable to COVID-19-related hardship.

Conclusion and Implications: There has been much discussion about the direct household impacts of COVID-19 and the potential benefits of government relief efforts (e.g., CARES Act relief payments). However, the direct impacts of the pandemic may also lead to long-term hardships for households who struggle with high-cost debts incurred during the pandemic. This study will quantify these potential impacts and aims to inform innovative and practical solutions for policymakers looking to promote consumer well-being during and after the COVID-19 pandemic.