Payday Loans Research Articles

Financial Knowledge, Personality Traits, and Risky Borrowing Behaviors in Iranian Households

This article examines the influence of financial knowledge and personality traits on risky borrowing behaviors among Iranian respondents. A proprietary dataset was used in this study. Logistic regression results indicated that numeracy and knowledge of the time value of money were negatively associated with two of the three risky borrowing behaviors (borrowing more than $1500 USD and use of rent-to-own). Conscientiousness was negatively related to the same two borrowing behaviors. Neuroticism negatively influenced use of payday lending. The article concludes with financial education policy suggestions for Iran and directions for future research.

Minimum Wages and Consumer Credit: Effects on Access and Borrowing

AbstractThis paper examines how minimum wages affect lender and borrower interactions with consumer credit markets. We find that higher state minimum wages increase the supply of unsecured credit, reduce payday loan usage, decrease delinquency, and increase credit scores. Overall, minimum wages reduce borrowing costs and have positive spillover effects on disposable income and liquidity. A back-of-the-envelope of the cost savings indicates that higher minimum wages increase disposable income by 1.3% more than implied by estimates of the direct effect on earnings.

Carla's Vacation

Carla is at a crossroads. She's in dire financial straits and seriously considering leaving her husband of 20 years. A group of her friends has invited her to vacation with them at the annual revival of a megachurch south of where she lives, and Carla desperately wants to go with them to have a chance to think and pray, but she needs at least $400 for the trip, and her options are once again asking for a loan from one of the families she cleans for (which she's embarrassed to do) or getting a loan from a payday lender. Wondering what she might do to make more money and reduce her expenses, Carla begins talking to the people in her life about creating a budget. Excerpt UVA-F-1920 Rev. Feb. 10, 2020 Carla's Vacation Introduction Carla couldn't believe she was back here again. As she pulled her old Chevy into the parking lot of the strip mall not far from her family's apartment, she grew even more apprehensive than she had been the last time. Once she parked, she stared up at the sign reading Cash Now at Clark's Loan & Jewelry and a part of her wanted to turn around and head home. But Carla didn't know where else to go. She had exhausted every lead imaginable for the cash she needed, and she had convinced herself that the vacation she had planned with her friends was too important to miss. After all, she rationalized, it wasn't as though she was heading to the Caribbean to soak up the sun on the beach—though she often dreamed of escaping to a tropical paradise. She was going to the annual revival at Olive Branch Baptist, a megachurch in Charlotte, North Carolina, about a four-hour drive south from her Virginia hometown. She knew she needed this vacation as much as anything else in her life. She was at a crossroads and wanted to put her faith first as she contemplated ending her 20-year marriage. Her girlfriends had convinced her that Brother Joshua's four-day revival would be far more powerful for her in person than it could ever be on TV or the $ 25 DVD they could bring home for her. Just the thought of a long weekend away from Lester's incessant berating made her feel as calm as the ocean waters she dreamed about. The loan would be worth it—as would selling her grandmother's antique gold earrings, she thought, turning off the car and the gospel music that piped loudly through her car stereo. . . .

Does Increasing Access to Formal Credit Reduce Payday Borrowing?

The use of high cost “payday loans” among subprime borrowers has generated substantial concern among policymakers. This paper provides the first evidence of substitution between “alternative” and “traditional” credit by exploiting an unexpected positive shock to traditional credit access among payday loan borrowers: the removal of a Chapter 7 bankruptcy flag. We find that the removal of a bankruptcy flag on a credit report results in a sharp increase in access to traditional credit and raises credit scores, credit card limits, and approval rates. However, despite meaningful increases in access to traditional credit, we find no evidence that borrowers reduce their use of payday loans, and our confidence intervals allow us to rule out even very small reductions in payday borrowing. Furthermore, we find evidence that flag removals increase the use of other alternative credit products such as online subprime installment loans. These results indicate that marginally improving access to less expensive formal credit is insufficient to meaningfully shift borrowers away from high cost subprime products. We discuss likely explanations for this including increased marketing of subprime products associated with the flag removal, the imperfect substitutability between cash and credit for low income borrowers, and an insufficiency in the size of the increase in credit access associated with the flag removal. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Who is Victimized by Fraud? Evidence from Consumer Protection Cases

This paper examines how fraud victimization varies across communities using data on victims from 23 consumer protection law enforcement actions. These cases span several different types of fraudulent activity, including payday loan, student debt relief, health care, and business opportunity scams, providing evidence on how demographics vary across types of fraud. For these cases, victim rates are higher in more heavily black, higher income, older, and more urban communities and are lower in more heavily Hispanic, higher household size, higher credit score, and more college-educated communities.

The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans

Abstract Citing consumer protection concerns, several states have recently enacted interest rate caps on small loans. After cataloguing the history of such legislation, we test whether these laws caused a decrease in the number of payday-lending establishments and subsequently prompted variation on incidence of bankruptcy filings. To motivate a causal interpretation of our estimates, we create a synthetic control that serves as a counterfactual from which we estimate the aggregate treatment effect of these interest rate ceilings. Importantly, we estimate the treatment effect for each period after the imposition of the cap, yielding novel insights about the dynamic heterogeneity in the relationship between payday-loan access and bankruptcy. Our results show payday-lending establishments drop by approximately 100%–a banishment of the industry. We find no short-run or long-run effects of these bans on bankruptcy. The range of our estimates allows us to rule out magnitudes that were documented in several previous studies.

Regulation and Recent Trends in High-Interest Credit Markets

In this article we review the contested effects of traditional payday loans on borrowers and describe recent regulatory changes to the product. We then provide detail on the institutional features and regulation—to the extent that there is any—of new products emerging to fill demand that remains when payday loans are more strictly regulated. Little is known about the effects of these new loan products on borrowers. What is certain is that state restrictions have led lenders to modify their loans to narrowly evade restrictions on interest rates, loan lengths, loan sizes, and repayment procedures like allowing loans to roll over. We focus on the starkest changes to small-dollar credit regulation that have occurred recently, including the development of high-interest installment loans, so-called flex loans offered by payday lenders, and the fintech creation of earned wage advance products.

Payday lending, crime, and bankruptcy: Is there a connection?

AbstractThe payday lending industry has been the subject of controversy over the years. This is largely due to the high fee structure of payday loans and the view of some that the industry targets economically vulnerable groups. For these reasons, some states prohibit payday lending, while others impose regulatory restrictions on their operations. Despite the prohibitions and restrictions, the industry nonetheless serves a significant segment of the U.S. population. Our purpose is to determine whether in addition to providing loans to individuals, access to payday lenders is associated with less property crime and fewer bankruptcies. Using a unique data set obtained directly from all state regulatory authorities, we find evidence, contrary to some earlier studies, that the presence of payday lenders may help reduce property crime as well as personal bankruptcies.

Testimony of Nakita Q. Cuttino Visiting Assistant Professor of Law, Duke University School of Law Before The United States Senate Committee on Banking, Housing and Urban Affairs

This document is the written testimony of Nakita Q. Cuttino for the June 30, 2020, hearing Digitization of Money and Payments by the U.S. Senate Committee on Banking, Housing and Urban Affairs. This testimony examines the existing and potential consumer risks posed by time and access frictions in the U.S. payments system. Specifically, these frictions have long been exploited in the marketplace by service providers like payday lenders and check cashers with deleterious effects on millions of Americans. Emerging financial technology, or fintech, services like early wage access programs demonstrate that these frictions will continue to be exploited in a digital economy. Accordingly, there is an urgent need to resolve these time and access frictions to improve consumer welfare. The testimony explains why a public banking option with existing payments infrastructure will most effectively serve the aims of financial inclusion in the immediate future.

Online Payday Lenders: Trusted Friends or Debt Traps?

The recent Senate inquiry into credit and hardship underscored the prevalence of predatory conduct in the payday lending industry. The rise of digitalisation has increased consumer access to high-cost payday loans and the ensuing risk of debt spirals. The article examines the marketing strategies of online payday lenders, revealing that the effect of mandatory warnings on the risk of harm are often diminished through website layouts. At the same time, lenders commonly offer fast, convenient cash in tandem with blogs that provide advice on managing finances and living well on a budget, obfuscating the distinction between advertising and altruistism. The findings highlight the need for regulatory enforcement of laws aimed at safeguarding vulnerable financial consumers. Emerging challenges from the increasing digitalisation of payday lending and social media marketing raise the need for reforms to address gaps in the regulatory framework.

The small-dollar loan industry: a new era of regulatory reform—and emerging competition?

The “small-dollar loan”, or “payday lending”, industry offers a short-term, unsecured lump-sum loan (usually under $500) to U.S. borrowers who promise to repay the loan. Loan pricing has attracted intense scrutiny of the industry from both advocates and critics alike, as these loans have a short term (“next payday”) to maturity and the cost of borrowing, expressed as an annual percentage rate, is nearly 400%. However, due to a new industry regulatory environment emerging at the federal level, a myriad of innovative financial (“fintech”) opportunities emanating from traditional banking and credit unions will be available to the underserved population. Furthermore, increased product and price competition will likely reduce the predatory non-traditional lending presence in the industry.

Life Below Zero: Predatory Overdrafts, Payday Lending and the Underbanked

The reordering of transactions from "high-to-low" is a controversial bank practice thought to maximize fees paid by low-income customers on overdrawn accounts. We exploit multiple class-action lawsuits resulting in mandatory changes to this practice, coupled with payday lending data, to show that, after banks cease high-to-low reordering, low-income individuals reduce their borrowing from alternative lenders. These consumers increase consumption, experience long-term improvements in financial health, and gain access to lower-cost loans in the traditional system. These findings show that aggressive bank practices create a demand for alternative financial services, highlighting an important link between the traditional and alternative financial systems.

FinTech Alternatives to Short-Term Small-Dollar Credit: Helping Low-Income Working Families Escape the High-Cost Lending Trap

FinTech Alternatives to Short-Term Small-Dollar Credit: Helping Low-Income Working Families Escape the High-Cost Lending Trap

Health insurance transitions and use of fringe banks: Evidence from the Affordable Care Act

AbstractThe Affordable Care Act (ACA) increased health insurance enrollment, potentially improving financial security. We test whether this insurance increase relates to changes in use of “fringe banks” (e.g., payday lenders, check cashers, and pawn shops). Using the panel structure of the Current Population Survey (CPS), we link 5 years of a Federal Deposit Insurance Corporation (FDIC)‐sponsored supplement to March CPS data. We find declines in fringe bank use, specifically fringe credit (e.g., pawn loans), associated with new insurance coverage with larger declines for households affected by the ACA's Medicaid expansion. These results suggest that health insurance reduces reliance on these controversial financial products.

DO CONSUMERS NEED MORE PROTECTION FROM SMALL‐DOLLAR LENDERS? HISTORICAL EVIDENCE AND A ROADMAP FOR FUTURE RESEARCH

We summarize the current debate surrounding four small‐dollar credit products: pawn loans, vehicle title loans, payday loans, and cash installment loans from finance companies. We review the contributions of scholars that inform this debate. We underscore that users of these products fit the description of those whom consumer credit models predict benefit from these products. Many studies find that, on average, consumer use of small‐dollar credit products is, at worst, innocuous. There are, however, findings of heterogeneity in borrowers' experiences. The disagreements surrounding these credit products and the difficulty in crafting the proper policy response stems from this heterogeneity. (JEL D18, G23)

Predatory Inclusion in Consumer Credit: Explaining Black and White Disparities in Payday Loan Use

Payday loans are a high‐cost form of credit, yet they remain a popular financial tool used by a significant proportion of Americans. Use of these loans varies significantly across social groups. Black households in particular are more than twice as likely to use payday lending as white households. Explanations for households’ decision to use payday loans remain disputed. Some scholars argue that poor financial literacy is a major driver of payday borrowing. Others propose instead that payday loans are a form of credit of last resort used after depleting higher quality sources of credit. In this article, I argue these explanations are incomplete and miss the racialized nature of payday lending. Payday lending is a form of predatory inclusion: it provides households experiencing exclusion from consumer credit markets with a needed source of credit but under conditions that jeopardize long‐term benefits of access. Given historical and contemporary patterns of financial exclusion, this process entails disproportionate reliance on payday lending by black households. Models using data from the Survey of Consumer Finances provide support for both the predatory inclusion and the credit exhaustion explanations. Predatory inclusion, however, explains the largest portion of racial disparities in payday loan use.

Recovering the Logic of Double Effect for Business: Intentions, Proportionality, and Impermissible Harms

ABSTRACTBusiness actors often act in ways that may harm other parties. While the law aims to restrict harmful behavior and to provide remedies, legal systems do not anticipate all contingencies and legal regulations are not always well-enforced. This article argues that the logic of double effect (LDE), which has been developed and deployed in other areas of practical ethics, can be useful in helping business actors decide whether or not to pursue potentially harmful activities in commonplace business activity. The article illustrates how LDE helps to explain the exploitative nature of payday lending, the distinction between permissible and impermissible forms of market competition, and the potential wrong of imposing risk of harm on others. The article also addresses foundational debates about LDE itself. We offer the article as an illustration of the sort of “midlevel” theorizing that can address directly the needs of practitioners.

Earned Wage Access and the End of Payday Lending

Fintech companies have developed a financial product that allows employees to gain access to wages that they have already earned before their scheduled payday. The fee for getting an earned wage advance is usually small, making this product an extremely attractive alternative to payday loans—the go-to resource for lower-income Americans for the past three decades. This Article is the first legal academic paper to analyze the earned wage advance market, assess the likelihood it will displace payday lending, and reveal some of the dangers lurking beneath the low-cost surface of these transactions. It argues that earned wage access products have the potential to end the thirty year reign of payday lending. But, earned wage advances do not fit neatly into existing legal categories, so policymakers need to establish legal certainty in the market to facilitate growth while at the same time ensuring that the law protects consumers.

Impacts of interest rate caps on the payday loan market: Evidence from Rhode Island

Abstract Interest rate caps are the most common form of payday loan regulation, yet little academic research has examined their consequences. I investigate the impacts of tightening the cap from 15% to 10% in Rhode Island, using a difference-in-difference framework and a unique proprietary dataset of payday loans issued by major nationwide lenders between 2009 and 2013. Lenders always charge the prevailing cap, creating a sharp and clean variation in interest rate. I show that loan usage increases at the extensive and intensive margins, amounting to elasticity estimates in the range of 0.7–1.0. I also find that loan sequences become longer and more likely to end with default. No lenders exit the market, implying that market power existed. Furthermore, I find no evidence of credit rationing as a result of the lower cap. These changes imply an upper bound of $3.3 million per year for neoclassical consumer surplus. However, I show that behavioral consumers can be worse off by the policy if more than half of the increase in demand is due to overborrowing.

Comparing spatial patterns of sole proprietorship and corporate payday lenders in Seoul, Korea

The financial regulation lowering the interest rate cap has changed the business model of payday loan services, and as such, we expect that the location of payday lenders may change as well. In particular, because financial business conditions for sole proprietorship and corporate payday lenders differ, their target customers are also expected to vary. The aim of this study is to identify and compare the spatial patterns of corporate and sole proprietorship payday lenders after the implementation of the financial regulation. In a case study of Seoul, Korea, we use a negative binomial regression for the number of corporate and sole proprietorship payday lenders after controlling for demographic conditions. Eigenvector spatial filtering is utilized to take into account the spatial autocorrelation among administrative regions in Seoul. The results from the regression analyses reveal that only sole proprietorship payday lenders are sensitive to less expensive housing and larger traditional markets. Our findings suggest that regulations that decrease the maximum payday loan interest rate can cause financial asymmetry in that economically distressed citizens may be more exposed to unhealthy payday lenders.