Consumer Spending Habits Relationship to Loan Default Risk: A Quantitative Correlational Study

In the finance industry, credit scoring models (CSM) and consumer default behavior models (CDBM) are the instruments of choice when assigning consumer loan default risk and categorizing (classifying) consumers as `good' or `bad' applicants. Current lending industry CSMs and financial institution lending practices rely heavily on consumers past performance and basic consumer demographics and generally exclude more specific information about consumer's financial practices and economic trends. In regards to loan delinquency rate trends, financial advisors and researchers are concluding that current CSMs, CDBMs, and lending institution practices seemingly fall short of identifying consumers who exhibit high loan default risk, especially amongst new loan applicants, which leads to higher than expected loan defaults. The specific problem investigated in this study was loan applications do not capture sufficient information (predictive variables) to successfully categorize an applicant as good or bad credit when predicting consumer loan defaults. This quantitative study explored the relationship between consumer spending habits (use of tobacco products, entertainment, and dining out) and attitudes towards money (distrust and anxiety) with consumer loan defaults through the use of Pearson Product correlation, Cronbach's and regression analysis, and analysis of covariance. The results were based on data collected from 178 participants throughout the United States region using the Money Attitudes Scale (MAS) and a data collection survey via Survey Monkey(c). The results for each individual predictive variable indicated no relationship with loan default, therefore the null hypothesis for the first five research questions failed to be rejected. Additionally, when each of the five predictive variables were merged and investigated using linear regression analysis there was also no relationship with loan default, therefore the null hypotheses for the sixth research question failed to be rejected. The insignificant relationship between spending habits and attitudes towards money with loan default would preclude loan institutions from incorporating these variables into their loan application process. Future research, based upon this study, could include a smaller population from a defined and regionalized area instead of the total U.S. population used in this study.