Payday Loans Research Articles

A quantitative study on the impact of a new outdoor advertising restrictions policy in Bristol (UK)

Abstract Background Bristol was the first city outside London to introduce a policy to restrict adverts for high fat, salt and sugar (HFSS) products and other unhealthy commodities (alcohol, gambling, payday loans) on council sites in 2021. This research evaluates the impact of this policy. Methods We conducted a controlled repeated cross-sectional study of Bristol (intervention) and neighbouring South Gloucestershire (control) residents before (n = 2,543) and after (n = 2,043) the policy came into effect. Self-reported exposure to adverts of HFSS products, alcohol and gambling and consumption/use of these products was collected. The intervention effect was analysed using a weighted controlled before-after design. In addition, we analysed 2020-23 timeseries of foods and drinks purchased by 1,012 households from Bristol (n = 217) and control areas (n = 795) from Kantar’s Worldpanel Take Home data. A controlled interrupted time series design was used to estimate the impact of the policy on weekly household purchases of energy and nutrients from HFSS products. Results Preliminary results did not indicate significant changes in exposure to unhealthy commodity adverts or consumption/use of unhealthy commodities post-intervention. However, the majority of results suggested a potential reduction; with for example a -22.1 (95% CI -47.3, 16.2) percentage point decrease in reported consumption of fast-food compared to controls. We also did not observe significant differences in weekly energy purchased from HFSS products compared to counterfactual; 897.6Kcal, 95%CI -57.7, 1,853.0, nor in purchases of fat (39.0g, 95%CI -20.1, 98.1), sugar (48.0g, 95%CI -19.8, 115.7) or salt (-0.4g, 95%CI -4.1, 3.2) from HFSS products. Conclusions Preliminary results indicate the new policy had no clear impact on exposure to unhealthy commodity adverts or purchasing and consumption of HFSS products. This may be attributable to the relatively small amount of total advertisement space owned by Bristol City Council (∼30%). Key messages • Policies restricting adverts of HFSS products and other unhealthy commodities are potentially effective tools to improve diet and to reduce diet-related diseases and public health inequalities. • We did not observe a measurable impact of this policy in Bristol, which may be attributable to the relatively small Council-owned advertisement estate within the total available advertisement space.

Living Free from Personal Debt: A Possibility or A Mere Wish?

The steady growth in personal debt over the years in the United States is beginning to raise concerns because people are slowly drowning in debt, and it is taking a huge toll on their everyday lives, their relationships, and their mental health. People are increasingly getting stressed, anxious, and depressed because the debts are overwhelming, and the payments are becoming difficult because of growing inflation and high interest rates. 8 out of every 10 adult Americans are reportedly drowning in debt, and it cuts across young adults to older adults who are retiring with debts. Debt is generally categorized as good debt and bad debt – good debt (student loans, business loans, and mortgages) is owed on things that will build wealth in the future, while bad debt (auto loans, credit cards, personal loans, payday loans) hardly improves one’s financial stability. This paper examines how possible it is to become debt-free and establishes that it is a journey that requires some level of discipline and positivity and will take a while to accomplish for anyone who is determined to get out of debt.

Innovation, Disruption and Consumer Harm in the Buy Now Pay Later Industry: An Empirical Study

‘Buy now pay later’ (‘BNPL’) has been described as ‘an Australian fintech growth story’, an innovative and disruptive financial product that has fundamentally changed the global market for consumer credit. Providers assert that BNPL promotes financial inclusion, allowing consumers to avoid the fees and interest associated with other, more expensive financial products. Yet critics maintain that BNPL is too readily accessible and that it can cause serious hardship, particularly for low income earners. This article is the first scholarly empirical study to focus on low income earners’ use of BNPL. It draws on a series of focus groups with consumer advocates and an online survey of consumers who have used BNPL, either alone or in conjunction with payday loans or pawn loans. Drawing on this data, the authors evaluate the Commonwealth Government’s current proposal to regulate BNPL more stringently, under the National Consumer Credit Protection Act 2009 (Cth).

Understanding the factors behind racial and ethnic disparities in the adoption of alternative financial services: a decomposition analysis

PurposeThe purpose of this study was to examine racial/ethnic differences in AFS use and their contributing factors using a decomposition analysis.Design/methodology/approachThe 2018 National Financial Capability Study dataset was used to analyze the four major types of AFS—title loans, payday loans, pawnshops, and rent-to-own (RTO) stores—as proxies for AFS use. The study conducted both logistic regression analysis and decomposition analysis to examine the contributing factors.FindingsThe results of the logistic regression analysis demonstrated significant disparities in the use of alternative financial services (AFS) among racial and ethnic groups. Specifically, it was found that Blacks were more likely to utilize title and payday loans, pawnshops, and rent-to-own (RTO) stores compared to Whites. In contrast, Hispanics and Asians/individuals of other ethnicities were less likely to use title loans, but Hispanics were more likely to opt for payday loans over Whites. Furthermore, objective financial literacy exhibited a negative association with the likelihood of using these four types of AFS, whereas subjective financial literacy consistently showed a positive association. When examining the decomposition analyses, it became evident that both objective and subjective financial literacy played significant roles in explaining the racial and ethnic disparities in AFS usage. However, the patterns varied in three specific pairwise comparisons.Originality/valueThis study revealed the relative contributions of each factor to the racial/ethnic disparities through decomposition analysis. Our Fairlie decomposition approach addressed non-linearities within the decomposition framework, particularly in estimating the probabilities of AFS utilization, given its binary outcomes. This extension builds upon the Oaxaca decomposition. The study offers valuable insights into the variations in AFS use among different racial and ethnic groups.

Understanding Vulnerability to the Poverty Premium: An Analysis of Factors Influencing Use of High-Cost Credit Among Low-Income Individuals

Introduction & BackgroundAccess to affordable credit is essential for individuals living on low incomes to participate in society fully. However, due to their limited credit history and volatile incomes, many cannot access mainstream sources of credit, such as credit cards and personal loans. As a result, they often must rely on more expensive sources of credit such as payday loans, doorstep loans or rent-to-own loans. This leads to them paying more for credit, also referred to as the poverty premium. Incurring the poverty premium exacerbates the financial challenges faced by already vulnerable individuals and can lead to a cycle of financial distress. Identifying the behaviours and factors that lead to a need for high-cost credit can help in identifying individuals who are most vulnerable to incurring the poverty premium. Objectives & ApproachTo achieve this, we rely on anonymized Open Banking transaction data from 100,000 individuals provided by a UK-based social lender.Given the latent nature of vulnerability, we identify indicators of vulnerability to poverty premium which include frequency of overdraft use, previous debt problems, low financial resilience, and indebtedness. We use a copula-based approach to create an index of vulnerability to poverty premium. This is based on weighting the individual indicators using their Spearman rank correlation coefficient. We use a fixed effects model to identify the factors that contribute to this vulnerability, where the index of vulnerability is the dependent variable. Relevance to Digital FootprintsWe use a rich and granular dataset on individual financial transactions to address a key social issue. The findings from this study can inform policy and industry efforts to promote greater credit affordability for these vulnerable individuals. This is particularly important due to the renewed concerns regarding the increased use of high-cost credit by individuals living on low incomes due to COVID-19 and the increased cost of living. ResultsOur findings show that variables related to the financial profile of an individual are important driving factors of the vulnerability to poverty premium. These include the number of salary sources, frequency of salary receipt, benefit receipt and savings frequency. Other variables related to spending behaviour such as gambling, volatility in fixed expenses and high transaction counts all have positive relationships with this vulnerability. Conclusions & ImplicationsThis study is a first step towards examining the determinants of vulnerability to poverty premium by analyzing an Open Banking transaction data set. The innovative feature of this work is the creation of an index of vulnerability to poverty premiums based on various indicators of financial distress and high-cost credit use. Our findings on the relationships between the individual's financial profile and the vulnerability to poverty premium suggest that policymakers should consider targeting interventions for individuals with specific profiles to alleviate the need for high-cost credit. For example, programs to promote regular savings or financial education for gamblers and people with volatile spending behaviour can help assist these individuals manage their finances better.

Sexual Orientation and Financial Well-Being in the United States

We study the relationship between financial well-being and sexual orientation in the United States using Survey of Household Economics and Decisionmaking (SHED) data for 2019-2022. We document that people who are lesbian, gay, and bisexual (or LGB) have significantly more difficulty managing financially than similarly situated heterosexual individuals—and this pre-dated the COVID-19 pandemic. Differences are found across a broad array of current and future financial well-being outcomes, including retirement savings, rainy-day funds, credit card and schooling debts, and the use of alternative financial services such as payday loans. Differences in partnership, financial assistance from parents, financial knowledge, and risk preferences cannot explain these differences. Instead, we document that some social vulnerabilities such as exposure to discriminatory behavior and violence are differentially experienced by LGB people, which may play a role. Our results demonstrate that people who are lesbian, gay, and bisexual experience significantly more financial insecurity than previously understood.

Payday alternative loans: PAL or Foe?

Payday alternative loans (PALs) are small, short-term loans granted by federal credit unions. This paper examines the history of these loans, characteristics of credit unions that grant PALs, and how these loans impact credit risk. Credit unions with a low-income designation offer PALs and make a higher amount and number of PALs in terms of the loan portfolio. Credit unions that offer PALs have lower loan delinquency rates and do not have more one-year forward-looking credit risk. The findings contribute to the broader literature on payday loan alternatives and credit union risk taking.

Blood Money: Selling Plasma to Avoid High-Interest Loans

Abstract Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the U.S. blood plasma industry to shed light on the sellers of plasma. Sellers tend to be young and liquidity-constrained with low incomes and limited access to traditional credit. Plasma centers absorb demand for nontraditional credit. After a plasma center opens nearby, demand for payday loans falls by over 13% among young borrowers. Meanwhile, foot traffic increases by over 4% at nearby stores, suggesting that constrained households use plasma markets to smooth consumption without appealing to high-cost debt.

Law and order? Associations between payday lending prohibition and alternative financial services use by degree of enforcement

AbstractSixteen jurisdictions in the United States prohibit payday lending through stringent usury laws or well‐established nonprofitable 36% interest rate caps. Yet over one in 10 consumers residing in these jurisdictions borrowed payday loans in the past 5 years. This raises questions about actual policy implementation and enforcement. We employ data from the 2018 National Financial Capability Study to investigate if associations between payday lending prohibitions and payday borrowing differ by degree of enforcement. We find that nuances in degree of enforcement among restrictive states are not associated with payday borrowing likelihoods. However, these nuances appear when examining payday borrowing frequency, particularly when controlling for consumers' financial circumstances and when conditioning on alternative financial services consumers. We consistently note the highest borrowing behaviors for states sans regulation. Policymakers may consider strengthening enforcement in cases where the primary goal is preventing or reducing payday borrowing.

Factors Contributing to Poverty among Artisanal Fisherfolk of in Ahoada West Local Government Area of Rivers State, Nigeria

This study investigated factors contributing to poverty among artisanal fisherfolk in Ahoada Local Government Area of Rivers State, Nigeria. By exploring the livelihoods of artisanal fisherfolk, this paper analyzed different aspects of poverty and identify factors that contribute to poverty in these communities. This descriptive study was guided by two research objectives and questions. The population of study consists of 520 members of 3 fisherfolks cooperative society in Rivers State, out of which 240 members was randomly sampled. The research instrument used for the study was a structured 24 item questionnaire designed on a modified 4-poin Liker scale format. The findings of the study reveal that lack of access to loan facilities, reduction in catch and socio-economic factors contributed to poverty among fisherfolk in Rivers State. This study came to the conclusion that poverty is pervasive in coastal communities in Rivers State because the majority of fishermen who live and work there have daily challenges that exacerbate rather than reduce their economic condition. Based on this the paper recommended that in order to give fishermen access to loans and free themselves from the shackles of payday lenders, the government of Rivers State urgently needs to expand the establishment of microfinance banks to coastal communities. Additionally, fishermen need to be properly educated on the importance of maintaining clean waterways and the proper application of government regulations governing effluent discharge on water bodies.

Are Large-Scale Data From Private Companies Reliable? An Analysis of Machine-Generated Business Location Data in a Popular Dataset

Large-scale data from private companies offer new opportunities to examine topics of scientific and social significance, such as racial inequality, partisan polarization, and activity-based segregation. However, because such data are often generated through automated processes, their accuracy and reliability for social science research remain unclear. The present study examines how quality issues in large-scale data from private companies can afflict the reporting of even ostensibly uncomplicated values. We assess the reliability with which an often-used device tracking data source, SafeGraph, sorted data it acquired on financial institutions into categories, such as banks and payday lenders, based on a standard classification system. We find major classification problems that vary by type of institution, and remarkably high rates of unidentified closures and duplicate records. We suggest that classification problems can affect research based on large-scale private data in four ways: detection, efficiency, validity, and bias. We discuss the implications of our findings, and list a set of problems researchers should consider when using large-scale data from companies.

Examining payday loan utilization among households with mainstream credit access

PurposeThis study aims to gain insight into the motivations behind the decision to use high-cost payday loans by households who possess mainstream credit and to determine whether this behavior has changed over time.Design/methodology/approachUsing data from Statistics Canada’s Surveys of Financial Security, probit models are used to examine the sociodemographic and financial indicators associated with payday loan use.FindingsThe analysis uncovers the sociodemographic and financial characteristics of payday loan-user households with access to lower-cost short-term loans. The findings indicate that the likelihood of payday loan use has risen over time. Additional analysis reveals that indicators of financial instability are positively associated with payday loan use among this group.Research limitations/implicationsThis research highlights the dichotomy of payday loan users and recommends policymakers tailor solutions to the specific needs of different types of payday loan users.Practical implicationsThis research highlights the distinguishing sociodemographic and financial characteristics of payday loan user households and recommends policymakers tailor solutions to the specific needs of different types of payday loan users.Originality/valueThis is the first study, to our knowledge, to focus analysis on payday loan use of those with access to lower-cost short-term credit alternatives in Canada and to include measures of financial instability in the analysis. This research is timely given the current economic environment of high interest rates and high levels of household debt.

Liquidity Based Contracting: A Path to Greater Efficiency in Payday Lending

Liquidity Based Contracting: A Path to Greater Efficiency in Payday Lending

Payday Lending in the UK: The Regul(aris)ation of a Necessary Evil?

Payday Lending in the UK: The Regul(aris)ation of a Necessary Evil?

Do payday lending bans protect or constrain regional economies? Evidence from the Military Lending Act's final rule

AbstractThe 2007 Military Lending Act attempted to ban high‐interest loans to U.S. military members and the 2017 “Final Rule” further restricted access, causing regional shocks in payday lending exposure in counties with a military base. Difference‐in‐differences and dynamic estimators provide mixed evidence on the effect of this payday lending access shock on regional economic outcomes and local business outcomes. However, we consistently find statistically significant reduced entry and exit of firms. Given payday lenders congregate around low‐income and minoritized populations analogously to how they congregated around military bases, these results provide policy implications for more general usury bans.

Non-bank credit and food hardship: The association between payday loans, pawn loans, rent-to-own contracts and food hardship in households with children

Low- and moderate-income (LMI) households with children are at-risk for food hardship and may rely on short-term credit to meet their food needs. This research examines how the use of three types of non-bank credit – payday loans, pawn loans, and rent-to-own transactions – is associated with food insecurity, food insufficiency, and food inadequacy using households matched between the Current Population Survey’s Food Security Supplement and the Unbanked and Underbanked Supplement. It finds a strong association between the use of any non-bank credit and food hardship. Payday loan and pawn loan use, particularly for households that use these products more frequently, have a larger association with food hardship than use of rent-to-own transactions. When examining the self-reported reasons for using non-bank credit, households that use non-bank credit to pay for basic living expenses rather than for specific expenses, such as a repairs or childcare expenses, have a stronger association with food hardship. However, biprobit estimates are imprecise and do not establish a causal link between use of non-bank credit and food hardship. Policy should promote affordable credit, expand assistance to purchase food, and assist households in acquiring savings to address the food hardship experienced by households using AFS credit.

Risk preference, payday loans and other alternative financial services

PurposeThe purpose of this paper is to examine how individual risk preference influences the borrowing of payday loans – a prevalent type of cash loan in the USA with exorbitantly high-interest rates. Additionally, this paper tests how risk preference determines other alternative financial services (AFS), including pawn shops, rent-to-own purchases, title loans, etc.Design/methodology/approachThe author applies Probit and Tobit regressions to test the relationship between individual risk preference and payday borrowing, based on the state-by-state survey data from National Financial Capability Study (NFCS) sponsored by Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.FindingsIndividuals with higher risk tolerance are more likely to borrow payday loans and other AFS, after controlling for financial situation, financial literacy, overconfidence and demographic features.Originality/valueThis paper is the first to study risk preference as an explanation to the high cost and widely used payday loan services in the United States of America. This study provides evidence that these cash loans are determined by inherent human characteristics. The finding provides new insight for the policymakers and regulators in the consumer debt market.

On payday lending: Identifying effective regulation measures

Many governments adopt regulations designed to prevent consumers from participating in specific financial markets or to limit the negative externalities of such markets. However, relatively little effort has been put into determining the efficacy of such regulatory measures. In many cases, effectively comparing these regulatory measures is limited by variations in preferences and cultures across nationalities. However, the United States may represent a unique situation where preferences and cultures are more homogenous across state lines than across international boundaries. As such, a comparison of the efficacy of these laws may yield a better understanding of which measures prove more effective than others. One such financial market that has received such attention is the payday lending industry, which is part of the broader subprime credit market. In the United States, each individual state has its own laws regarding subprime lending. The analysis in this paper finds that while some legal regimes have a relationship to positive or negative outcomes among consumers, others seem to have no relationship at all.

The profitability analysis of fintech microlending: advanced Whale curve tools applying

Fintech is actively expanding its activities in various directions in the modern financial system. One of these directions is the development of consumer lending, which forms an important competitive factor for banks and other traditional lenders. Lending models implemented by fintech companies have a number of fundamental differences from classic ones. The article is devoted to the study of the fintech microcredit model and the profitability analysis of this model based on the advanced Whale curve toolkit adapted to lending.In the article, the microcredit model is structured into three blocks, which include income generation, credit risk management systems, and borrower lead generation. Income generation is considered within the PDL (payday lending) approach. The methodological components of the application of the Whale curve toolkit for lending are justified. The first component outlines a holistic visualization of the relationship between risk and profitability of the credit portfolio of microcredit. The second component is the use of two approaches to the application of the Whale curve toolkit. The first approach is based on the choice of the basis of analysis of income from borrowers, and the second – on the choice of the basis of analysis of income from loans issued. The third component of the methodology was the segmentation of the loan portfolio into 4 segments: A, B, C, and D. It was done for both approaches. Segment A is characterized by the generation of high profitability for the creditor, segment B is close to a neutral level of profitability, and segments C and D are defined by a negative financial result of different levels.The analysis, based on the developed methodology, made it possible to identify a number of regularities between risk and profitability both in terms of segments A, B, C, and D and in terms of repeated loans. The analysis was conducted on the basis of data from several Ukrainian fintech companies for the 2nd and 3rd quarters of 2021.Within the methodological components, the analysis of income sensitivity based on the scenario approach was used in the work. A number of scenarios regarding changes in credit characteristics and risk management parameters were formed. On this basis, the sensitivity of income to these changes was modeled, and a comparative analysis of the results was carried out.The methodology proposed in the article makes it possible to implement an optimization analysis of fintech microcredit, to determine the relationship between credit risk and profitability, and to choose the optimal strategy for increasing the profitability of lending.
 JEL classіfіcatіon: G23, L25

Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior

Abstract Pay-as-you-go contracts reduce minimum purchase requirements, which may increase market participation. This paper randomizes the introduction and price(s) of a novel pay-as-you-go contract to the California auto insurance market, where 17% of drivers are uninsured. The pay-as-you-go contract increases take-up by 10.8 p.p. (89%) and days with coverage by 4.6 days over the 3-month experiment (27%). Demand is relatively inelastic, and pay-as-you-go increases insurance coverage in part by relaxing liquidity requirements: most drivers’ purchasing behavior is consistent with a cost of credit in excess of payday lending rates, and 19% of drivers have a purchase rejected for insufficient funds.