Payday Loans Research Articles

The Phenomenon of Repeat Payday Loan Borrowing in the United States: Assessing Risk and Protective Factors among the Financially Vulnerable

Abstract Payday lenders provide high-cost short-term loans to those who have limited access to traditional financial institutions. Although an overwhelming majority of payday loan customers are repeat borrowers, studies examining the phenomenon of repeat borrowing is scant. Our study aimed to assess risk and protective factors among repeat payday loan borrowers. Using Bankruptcy filers' data obtained through the Public Access to Court Electronic Records database of the United States Bankruptcy Court of a Southern district, we conducted a multinomial logistic regression analysis to compare one-time and repeat borrowers with non-borrowers (N = 453). Findings revealed that medical debt and the number of children are associated with an increased risk of repeat borrowing. Homeownership is associated with a decreased risk of both one-time and repeat borrowing. In contrast, student loans are associated with an increased risk of one-time borrowing. Implications for social work practice, policy, research, and education to engage with financially vulnerable households, build assets and financial capability, and address risk and protective factors of alternative financial services such as repeat payday loan borrowing toward achieving socio-economic justice goals are discussed.

Turning Wages into Capital Differentiation on the Market for Unsecured Loans in the United States, 1900-1945

AbstractIn this article, we show how interpretive battles about compliance can lead to regulatory differentiation and, in turn, market segmentation. To do so, we study the evolution of unsecured lending in the United States, between 1900 and 1945. In the early 20th century, a large segment of the workforce relied on their wages to access credit: this required the “legal coding” of labor income into capital, where lenders would offer advances in exchange for a lien over future revenues. Regulating these transactions raised conflicts between Progressive reformers, lenders and, after 1929, federal regulators, which spanned over five decades. The historical comparison of three states—Illinois, New York and Georgia—, shows that local discussions revolved around three outcomes—legal status, pricing method and collateralization—, the issue of which led to distinct regulatory paths and market configurations at the state level. Finally, the New Deal policies created an additional strand of federal coding, furthering market divides between unregulated payday lenders, non-bank credit companies, and commercial banks. On financial markets, discussions about compliance often revolve around calculative technologies, and we suggest this as a possible crossing point between STS analyses of capitalization devices and Pistor’s theory of capital modulation.

How positive service experiences contribute to service captivity

PurposeService captivity is described as the experience of constrained choice whereby a consumer has no power and feels unable to exit a service relationship. This study aims to explore how positive service experiences can contribute to service captivity in the alternative financial services (AFS) sector for consumers experiencing financial vulnerability.Design/methodology/approachA total of 31 interviews were undertaken with Australian consumers of payday loans and/or consumer leases.FindingsThe authors reveal a typology of consumers based on their financial vulnerability and their experience with AFS providers. Then they present three themes relating to how the marketing practices of these providers create a positive service experience, and, in doing so, can contribute to service captivity for consumers experiencing financial vulnerability.Research limitations/implicationsThe benefits derived from positive service experiences, including accessible solutions, self-esteem, and a sense of control over their financial situation, contribute to the service captivity of some consumers, rendering alternative avenues less attractive.Practical implicationsAFS providers must ensure a socially responsible approach to their marketing practices to minimize potentially harmful outcomes for consumers. However, a systems-level approach is needed to tackle the wider issue of financial precarity. Policymakers need to address the marketplace gaps, regulatory frameworks and social welfare policies that contribute to both vulnerability and captivity.Originality/valueThis research extends the understanding of service captivity by demonstrating how positive service experiences can perpetuate this situation. Further, specific solutions are proposed at each level of the service system to address service captivity in the AFS sector.

Banks, alternative institutions and the spatial-temporal ecology of racial inequality in US cities.

Research has made clear that neighbourhood conditions affect racial inequality. We examine how living in minority neighbourhoods affects ease of access to conventional banks versus alternative financial institutions (AFIs) such as check cashers and payday lenders, which some have called predatory. Based on more than 6 million queries, we compute the difference in the time required to walk, drive or take public transport to the nearest bank versus AFI from the middle of every block in each of 19 of the largest cities in the United States. The results suggest that race is strikingly more important than class: even after numerous conditions are accounted for, the AFI is more often closer than the bank in low-poverty racial/ethnic minority neighbourhoods than in high-poverty white ones. Results are driven not by the absence of banks but by the prevalence of AFIs in minority areas. Gaps appear too large to reflect simple differences in preferences.

Blaming me, blaming you! The pendulum of blame in payday lending

Following a negative service experience, existing studies assert that consumers attribute blame either internally (self-blame) or externally (other-blame) with little indication that the attribution ever changes. This study explores blame to discover whether there are changes in attribution, specifically whether it may shift from self to other. Analysing qualitative data from borrowers in the payday lending market using I-/They-poems, this study finds firstly that blame oscillates between self and other and, secondly, that payday borrowers practice counterfactual thinking to alleviate negative emotions, which in turn prompts this blame oscillation. In revealing that blame attribution can act as a pendulum oscillating between self and other, this study makes a critical advance to existing blame research. The study also supports previous studies in I-/They-poems in uncovering novel insights into consumer theory. Evidence also emerges that the neoliberal view of the ‘empowered consumer’ interacts with the more traditional, organisation-oriented perspective, as from a consumer behaviour perspective, the attempts to improve psychological well-being and the oscillation of blame contribute to shifts in the perceived power in the loan market.

Achieving the United Nations' sustainable development goals through financial inclusion: A systematic literature review of access to finance across the globe

Access to credit may have a direct effect on achieving United Nations (UN) Sustainable Development Goals (SDGs) in ending poverty, improving health and education, and reducing inequality. In this paper, we systematically review the growing empirical evidence on whether individuals' demographic characteristics (such as gender and race) and socio-economic features (such as income and education) effect their ability in accessing credit. Our survey covers peer-reviewed articles providing empirical evidence, using quantitative and qualitative data, published between 2000 and 2020 (February). We find that having more education and/or being more financially literate increases households' and entrepreneurs' access to credit. Individuals with lower income and less wealth are less likely to obtain credit from the mainstream financial institutions. In emerging countries, women are more likely to be rejected and deprived from formal credit, and pay higher cost. Non-Whites, ethnic minorities, disabled people and immigrants are also more likely to be excluded from the formal credit markets. We find that abovementioned credit deprived segments of the society resort to fringe finance providers, such as pay-day lenders or pawnbrokers, with higher costs. These findings are remarkably similar across developed and developing countries. Finally, we provide direction for further research in achieving SDGs through financial inclusion and access to credit by highlighting various shortcomings of the existing literature and empirical evidence.

Are High-Interest Loans Predatory? Theory and Evidence from Payday Lending

It is often argued that people might take on too much high-cost debt because they are present focused and/or overoptimistic about how soon they will repay. We measure borrowers' present focus and overoptimism using an experiment with a large payday lender. Although the most inexperienced quartile of borrowers underestimate their likelihood of future borrowing, the more experienced three quartiles predict correctly on average. This finding contrasts sharply with priors we elicited from 103 payday lending and behavioral economics experts, who believed that the average borrower would be highly overoptimistic about getting out of debt. Borrowers are willing to pay a significant premium for an experimental incentive to avoid future borrowing, which we show implies that they perceive themselves to be time inconsistent. We use borrowers' predicted behavior and valuation of the experimental incentive to estimate a model of present focus and naivete. We then use the model to study common payday lending regulations. In our model, banning payday loans reduces welfare relative to existing regulation, while limits on repeat borrowing might increase welfare by inducing faster repayment that is more consistent with long-run preferences.

The impact of payday lending on crimes

Police departments located in states allowing payday lending report 14.34% more property crimes than the police departments located in states not allowing payday lending. I also find that the police departments located in counties bordering with states allowing payday lending report more property crimes. Those results are driven by the financial pressure induced by payday loans. Furthermore, the impact of payday lending concentrates in areas with a higher proportion of the minority population.

The Lived Experience of Financialization at the UK Financial Fringe

AbstractThe financialization of everyday life has received considerable attention since the 2008 global financial crisis. Financialization is thought to have created active financial subjects through the ability to participate in mainstream financial services. While the lived experience of these mainstream financial subjects has been the subject of close scrutiny, the experiences of financial subjects at the financial fringe have been rarely considered. In the UK, for example, the introduction of High-Cost, Short-Term Credit [HCSTC] or payday loan regulation was designed to protect vulnerable people from accessing unaffordable credit. Exploring the impact of HCSTC regulation is important due to the dramatic decline of the high-cost credit market which helped meet essential needs in an era of austerity. As such, the paper examines the impact of the HCSTC regulation on sixty-four financially marginalized individuals in the UK that are unable to access payday loans. First, we identify the range of socioeconomic strategies that individuals employ to manage their finances to create a typology of financial subjectivity at the financial fringe. Second, we demonstrate how the temporal and precarious nature of financial inclusion at the financial fringe adds nuance to existing debates of the everyday lived experience of financialization.

Abstract S10-02: Financial hardship and mental health among cancer survivors during the COVID-19 pandemic: An analysis of the U.S. COVID Impact Survey

Abstract Background: Cancer survivors often experience financial hardship due to high costs associated with cancer treatment. Our objective was to (1) identify determinants of financial hardship, and to (2) evaluate the impact of financial hardship on mental health symptoms among cancer survivors during the COVID-19 pandemic. Methods: We used nationally representative data from the COVID-19 Household Impact Survey collected at three-time points: April 20-26, May 4-10, and May 30th -June 8th of 2020. Our primary exposure was cancer survivor status, based on participant’s self-report of a cancer diagnosis (n=854, 7.1%). We defined financial hardship using the following question: “Suppose you have an unexpected expense that costs $400. Based on your current financial situation, how would you pay for this expense?” Respondents were categorized as experiencing financial hardship if they chose the following options: I wouldn’t be able to pay for it right now; sell something; use a payday loan, deposit advance, or overdraft; borrow from a friend or family member. Chi-square (χ2) tests were used to compare reported financial hardship among cancer survivors to other U.S. adults. Multivariable Poisson regression was used to identify determinants of financial hardship among cancer survivors. We used multinomial logistic regression to evaluate associations of financial hardship on mental health symptoms of cancer survivors. Results: Eighteen percent of cancer survivors reported experiencing financial hardship. Cancer survivors aged 30-44 (44.8%) and 45-59 years (25.9%) more frequently reported financial hardship compared to adults without cancer (23.4%, 16.7%, respectively, χ2p<0.05). Compared to cancer survivors aged 60+ years, those aged 18-29 (aPR: 2.54, 95% CI; 1.51-4.28), 30-44 (aPR:3.41, 95% CI:2.26-5.16), and 45-59 years (aPR:3.66, 95% CI:2.26-5.16) were more likely to experience financial hardship. Cancer survivors on Medicaid (aPR: 1.76, 95% CI: 1.16-2.66) were more likely to experience financial hardship compared to their counterparts. Compared to those without a high school degree, cancer survivors with some college education (aPR: 0.30, 95% CI: 0.18-0.47) and with a ≥Baccalaureate degree (aPR:0.05, 95% CI: 0.02-0.14) were less likely to experience financial hardship. Rural cancer survivors had 61% higher prevalence of financial hardship compared to urban residents (aPR: 1.61, 95% CI:1.00-2.58), however, suburban residents were less likely to experience financial hardship compared to cancer survivors living in urban areas (aPR: 0.65, 95% CI:0.44-0.98). Cancer survivors who experienced financial hardship were more likely to report feeling depressed (aOR: 2.78, 95% CI: 1.39-5.56), lonely (aOR: 3.06, 95% CI: 1.39-6.72), and hopeless (aOR: 3.16, 95% CI: 1.36-7.37) 3-7 days during the last 7 days. Conclusion: Lower SES measures and younger age were determinants of experiencing financial hardship among cancer survivors. During the COVID-19 pandemic, there is a high burden of mental health symptoms among cancer survivors experiencing financial hardship. Citation Format: Jessica Y. Islam, Denise C. Vidot, Marlene Camacho-Rivera. Financial hardship and mental health among cancer survivors during the COVID-19 pandemic: An analysis of the U.S. COVID Impact Survey [abstract]. In: Proceedings of the AACR Virtual Meeting: COVID-19 and Cancer; 2021 Feb 3-5. Philadelphia (PA): AACR; Clin Cancer Res 2021;27(6_Suppl):Abstract nr S10-02.

The financial impact of cancer on Canadian young adults.

To explore the financial impact of cancer in young adults (YAs) compared to matched non-cancer peers. Five hundred seventy-five YAs from the Young Adults with Cancer in their Prime (YACPRIME) studyreported on out-of-pocket cancer costs and missed work. YA cancer survivors were compared to matched peers without cancer on key financial indices based on current age (< 35 vs. 35 + years) and time since diagnosis (< 5 vs. 5 + years). Descriptive statistics, Chi-square tests, and prevalence ratios (PR) were used to compare groups on financial variables. Almost 60% of YA survivors spent at least $100/month on cancer-related expenses, and 49% missed at least one year of work. YA survivors were more likely to have outstanding credit card ((< 35 (PR = 1.37, p = 0.001); 35 + (PR = 1.33, p = 0.001)) and line of credit (< 35 (PR = 1.42, p = 0.008); 35 + (PR = 1.27, p = 0.016)) balances. Home ownership was higher among non-cancer peers ((< 35: PR = 1.42, p < 0.001); 35 + (PR = 1.69, p < 0.001); < 5 years (PR = 1.39, p < 0.001); 5 + years (PR = 1.41, p = 0.005)). YA survivors were more likely to not own assets ((< 5 years (PR = 2.25, p < 0.001); 5 + years (PR = 2.25, p = 0.004)). Those diagnosed within 5 years had higher rates of payday loans (PR = 3.91, p = 0.021). While exploratory, results suggest that YAs are disadvantaged compared to their peers in type and value of assets owned and debts carried. Survivorship care plans for YA survivors should include resources to manage the financial impacts of cancer.

What accounts for racial and ethnic differences in credit use?

AbstractRacial and ethnic differences across U.S. households in use of bank credit (e.g., credit cards) and nonbank credit (e.g., payday loans) are striking. We examine whether household characteristics and residential location can explain these differences. We use a novel dataset with information on previously unexplored factors, including income volatility, subjective attitudes about banks, geographic proximity to financial providers, and neighborhood population characteristics. We find that much of the raw disparities in credit use are attributable to observable household characteristics. Accounting for neighborhood population characteristics meaningfully reduces the disparities further. However, the residual racial and ethnic disparities remain large in magnitude. We show these disparities are not likely attributable to unobserved differences in households' family background, financial literacy, subjective attitudes, or credit scores. Instead, they are most likely attributable to unobserved supply‐side factors, such as racial and ethnic differences in households' exposure to marketing. We conclude with implications for policy.

Payday Lending and the Opioid Epidemic

Using the variation in payday lending access generated by state statutes allowing or prohibiting payday lending, I find that allowing payday lending increases opioid-related mortality rates by about 32% of its mean, which amounts to 26 additional lives lost per 100,000 population every year. The results are robust after controlling for the county- and state-level socioeconomic conditions, and unlikely to be driven by confounding events, the time trend, or systematic differences between states allowing and prohibiting payday lending. Furthermore, the effect is more pronounced in areas with low socioeconomic status.

Positive Profits in Competitive Credit Markets With Adverse Selection

We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of ‘soft’ information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing.

The Effects of Disclosure and Enforcement on Payday Lending in Texas

The Effects of Disclosure and Enforcement on Payday Lending in Texas

Consumer Use of Payday, Auto-Title, and Pawn Loans: Insights from the Making Ends Meet Survey

Consumer Use of Payday, Auto-Title, and Pawn Loans: Insights from the Making Ends Meet Survey

The Effects on Consumers from Two State-Level Regulations of the Payday Loan Market

The Effects on Consumers from Two State-Level Regulations of the Payday Loan Market

The Payday Loan Puzzle: A Credit Scoring Explanation

The Payday Loan Puzzle: A Credit Scoring Explanation

The Effects of Disclosure and Enforcement on Payday Lending in Texas

Inspired by the field experiment in Bertrand and Morse (2011), the state of Texas adopted an information disclosure for consumers taking out payday loans starting in January, 2012. The disclosure compares the cost of payday loans with other credit products, and presents their likelihood of renewal in easy-to-understand terms. Simultaneously, Austin and Dallas implemented stricter supply restrictions through city ordinances. We analyze both types of regulations, and find that the statewide disclosures led to a significant and persistent 13% decline in loan volume in the first six months after implementation. The city ordinances led to a 62% decline in loan volume in Austin and a 20% decline in Dallas, with the timing of the effect driven by the start of enforcement rather than the effective date of regulation. The results show that both behaviorally-motivated disclosures and city-level supply restrictions can have a significant impact on equilibrium loan quantities, with no effect on prices or evidence of evasive income falsification. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Online Payday Lending: System Dynamics Modelling

The purpose of the article is to model the payday lenders activity, which carries out crediting on-line in the segment of subprime small-dollar credits (payday loans). The relevance of the research in this segment is stipulated by its dynamic developing in the latest decade. This is explained by intensive implementation of on-line technologies into the lending processes. The segment has distinctive features of credit activity, the analysis of which is presented in the article. Such basic features are a high risk, a highly competitive environment, and a high interest rate. Similar features generate the importance of the strategy of the company development, because a wrongly formed strategy generates a high enough risk of bankruptcy. The system dynamic application is presented for modelling of the credit activity of such companies. This approach allowed to model the influence of change of one element on another and on the system of payday lending as a whole. The built model includes four main ‘cornerstones’ of the system. Namely: the investor’s capital flow, the process of attracting borrowers, the dynamics of the transition of borrowers in the loan portfolio from one type to another, and the rigidity of credit risk management. The investor’s capital flow is a J-curve. The process of attracting borrowers is structured in the attracting of new borrowers and repeat borrowers. A feature of the payday loan market is the decreasing of borrower’s quality over time. The model presents the division of borrowers into five types depending on the revenues they generate for the lender. For each type, the model presents what profit/loss can be expected from customers of this type. The model takes into account such important relationships as the impact of interest rates on the deterioration rate of the borrower’s financial condition (transition between types of borrowers) and the impact of attracting new borrowers on their quality (distribution of borrowers by type), taking into account that borrowers leave the company. This model was illustrated using a simulation analysis, which allows to find the optimal lending parameters in relation to the amount of the lender’s initial capital. JEL classіfіcatіon: G21, E47 Manuscript received 30.04.2020