Asian Journal of Education and Social Studies

Background: The empirical knowledge of the relationship between loan performance and financial literacy in understudied rural context is greatly advanced by this publication. It provides policymakers with concrete insights by quantitatively validating that the knowledge, skills, behavior, and awareness components of financial literacy work together to promote repayment discipline and lower loan defaults.

Aims: This study aimed to contribute to the body of knowledge by quantitatively assessing the correlates between financial literacy and loan performance, with a focus on loan defaults and NPLs in local contexts.

Place and Duration of Study: This study used a descriptive correlational design, conducted in Boston, Davao Oriental, Philippines, as it is conveniently close to the researcher’s location, which provided easier and sufficient access to information for local loan takers. Additionally, the intervention or the gathering of data from the respondents was completed from March and April 2025.

Methodology: The respondents of this study were 260 individuals from different financial institutions. This study utilized the snowball sampling technique as it allows the identification and recruitment of participants with specific characteristics, such as individuals involved in loan-taking, through referrals from initial respondents, which is particularly useful when the population is difficult to access (Parker et. al, 2019). A structured questionnaire adapted from Plaza (2023) was used to measure the level of financial literacy among borrowers. The second part of the survey will focus on collecting information about the respondents’ loan performance. Responses were measured using 5-point Likert scale. Descriptive statistics and correlational analysis were used to determine the strength and direction of the association between these variables.

Results: the composite variable of overall financial literacy shows a strong relationship with both loan repayment status (r = 0.71) and overall loan performance (r = 0.78), and a moderate relationship with fines and penalties (r = 0.65), all highly significant at p = 0.00. Idris et al. (2018) found that clients who underwent financial education programs before borrowing exhibited higher loan repayment rates and better loan utilisation. Their findings closely reflect the significant relationship shown between overall financial literacy and loan performance, suggesting that interventions aimed at enhancing literacy can lead to measurable improvements in financial behaviour.

Conclusion: The study confirmed a significant positive relationship between financial literacy and loan performance among borrowers. All four components, financial knowledge, skills, behavior, and awareness, contributed moderately to loan outcomes, with overall financial literacy showing a strong correlation with repayment status and overall loan performance. The findings emphasize that enhancing financial literacy is essential for reducing loan defaults and improving financial stability, especially in rural areas like Boston and Davao Oriental, where formal financial education may be limited. Strategic and targeted financial education programs are necessary to empower borrowers to make informed and sustainable financial decisions.