Payday Loan Choices and Consequences

By Neil Buhtta, Federal Reserve Board, Paige Marta Skiba, Vanderbilt University, and Jeremy Tobacman, University of Pennsylvania and NBER – April 2, 2014

High-cost consumer credit has proliferated in the past two decades, raising regulatory scrutiny. We match administrative data from a payday lender with nationally representative credit bureau files to examine the choices of payday loan applicants and assess whether payday loans help or harm borrowers. We find consumers apply for payday loans when they have limited access to mainstream credit. In addition, the weakness of payday applicants’ credit histories is severe and longstanding. Based on regression discontinuity estimates, we show that the effects of payday borrowing on credit scores and other measures of financial well-being are close to zero. We test the robustness of these null effects to many factors, including features of the local market structure.

The effect of state legislation restricting payday lending on consumer credit delinquencies: An investigation of the debt trap hypothesis

By Chintal A. Desai, Virginia Commonwealth Univeristy and Gregory Elliehausen, Board of Governors of the Federal Reserve – March 31, 2014

The availability of payday loans is often implicated in financial distress. We test this hypothesis by analyzing delinquencies on revolving, retail, and installment credit in Georgia, North Carolina, and Oregon. These states have restricted the formerly easy availability of payday loans by either banning them outright or capping the fees charged by payday lenders. The results, based on difference-in-difference methodology, suggest that this legislation has had small, mostly positive, effects on delinquencies. The results do not support the debt trap hypothesis that payday loans exacerbate borrowers’ financial difficulties. With more states considering further restrictions on payday lending, our findings have policy implications.

Payday Loans and the Borrower Experience

Harris Interactive – December 2013

Payday Loans and the Borrower Experience: Executive Summary

Harris Interactive – December 2013

Consumer Borrowing After Payday Loan Bans

By Jacob Goldin and Tatiana Homonoff, Princeton University – November 5, 2013

High-interest payday loans have proliferated in recent years. Using new data from the Current Population Survey, we exploit state-time variation in payday lending laws to study the effect of payday loan restrictions on consumer borrowing. We find that although such policies are effective at reducing payday lending, consumers respond by shifting to other forms of high-interest short-term credit such as pawn shop loans. This result sheds light on the mechanisms by which payday loan access affects borrowers' financial well-being and suggests that legislative efforts to address payday lending in isolation may not reduce the extent to which consumers rely on short-term high-interest credit products. Finally, we present evidence that those who switch to pawn loans after payday loan bans do so because they lack access to small bank loans.

Assessing the Optimism of Payday Loan Borrowers

By Ronald Mann, The Center for Law and Economic Studies Columbia University School of Law – March 12, 2013

This essay compares the results from a survey administered to payday loan borrowers at the time of their loans to subsequent borrowing and repayment behavior. It thus presents the first direct evidence of the accuracy of payday loan borrowers’ understanding of how the product will be used. The data show, among other things, that about 60% of borrowers accurately predict how long it will take them finally to repay their payday loans. The evidence directly contradicts the oft-stated view that substantially all extended use of payday loans is the product of lender misrepresentation or borrower self-deception about how the product will be used. It thus has direct implications for the proper scope of effective regulation of the product, a topic of active concern for state and federal regulators.

Do Payday Loans Trap Consumers in a Cycle of Debt?

By Marc Anthony Fusaro, Arkansas Tech University and Patricia J. Cirillo, Cypress Research Group – November 16, 2011

It is estimated that payday lenders made $40 billion of loans in 2010. But these loans are controversial, with one of the politically charged claims being that the high interest rates on payday loans trap consumers in a “cycle of debt.” We test this claim by conducting a field experiment whereby a random sample of borrowers are given interest-free payday loans. We then track these loans and find no difference in loan repayment rates between this treatment group and a control group of borrowers who paid conventional payday-loan interest rates. This result forms strong evidence that high interest rates on payday loans are not the cause of a “cycle of debt.”

Payday Holiday: How Households Fare after Payday Credit Bans

By Donald P. Morgan and Michael R. Strain, Federal Reserve Bank of New York - November 2007

Payday loans are widely condemned as a “predatory debt trap.” We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.