Informal Savings

People run their financial lives with a variety of tools. The first tools that come to mind are likely to be formal, like checking accounts and credit cards. But households often use informal tools that are harder to see from outside, like short-term loans from friends or relatives. It’s tempting to think that these informal tools are last resorts, or second-best solutions, but informal financial mechanisms are often combined with formal tools, and sometimes are preferred. Among the families in the U.S. Financial Diaries (USFD), for instance, the use of informal loans was as common as the use of alternative financial services (e.g., payday loans, pawn shop loans), though the volumes transacted informally tended to be smaller. Understanding how these informal finance tools work, and why households use them, can offer new perspectives for financial services innovators and policy makers.

Informal Savings