Use Of Payday Loans Research Articles

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.

A National Examination on Payday Loan Use and Financial Well-being: a propensity score matching Approach

A National Examination on Payday Loan Use and Financial Well-being: a propensity score matching Approach

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.

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.

Importance of Subjective Financial Knowledge and Perceived Credit Score in Payday Loan Use

This study examined the factors associated with consumers’ decisions to use payday loans. Using a sample of 24,201 respondents from the 2015 National Financial Capability Study (NFCS), structural equation modeling was used to analyze the relationships among the variables. The results indicated that payday loan use was associated with a series of consumers’ socio-psychological factors, including financial knowledge, perceived credit score, credit-card payment problems, and having emergency funds. The findings suggested that, to improve borrowing decisions and industry practices, discussions about consumers’ payday loan use and its underlying repayment problems should encompass policy intervention and institutional attention, rather than focusing on behavioral modification at the individual level alone.

Pecuniary Mistakes? Payday Borrowing by Credit Union Members

This chapter examines patterns of financial choices by a credit union’s members using transaction-level administrative data on checking, savings, and line-of-credit (LOC) accounts. We observe substantial payday loan use when cheaper sources of liquidity are available, resulting in average interest losses of about $88 over six and a half months. In addition, we find much higher levels of transaction activity by payday borrowing members than by other members, at half the average transaction dollar magnitude. These results are consistent with previous work identifying financial stress and decision-making challenges.

Early Medicaid Expansion Associated With Reduced Payday Borrowing In California.

We examined the impact of California's early Medicaid expansion under the Affordable Care Act on the use of payday loans, a form of high-interest borrowing used by low- and middle-income Americans. Using a data set for the period 2009-13 (roughly twenty-four months before and twenty-four months after the 2011-12 Medicaid expansion) that covered the universe of payday loans from five large payday lenders with locations around the United States, we used a difference-in-differences research design to assess the effect of the expansion on payday borrowing, comparing trends in early-expansion counties in California to those in counties nationwide that did not expand early. The early Medicaid expansion was associated with an 11percent reduction in the number of loans taken out each month. It also reduced the number of unique borrowers each month and the amount of payday loan debt. We were unable to determine precisely how and for whom the expansion reduced payday borrowing, since to our knowledge, no data exist that directly link payday lending to insurance status. Nonetheless, our results suggest that Medicaid reduced the demand for high-interest loans and improved the financial health of American families.

Financial literacy and use of payday loans in the United States

ABSTRACTUsing the 2012 National Financial Capability Study, this study investigated the relationship between financial literacy and payday loan use. An instrumental variable approach was employed to address a possible endogeneity issue using a newly developed instrument of financial literacy based on the community network effect. Results from linear regressions indicated that financial literacy was associated negatively with the use of payday loans, and its effect was greater with the use of the instrument.

Research-based service-learning: outcomes of a social policy course

Previous research has found service-learning in undergraduate social policy courses to increase students’ knowledge, skills, values, and competence. The present study utilized a sample of 60 graduate-level social work students who participated in a research-based service-learning (RBSL) project that involved collecting and analyzing data about the extent of payday loan use among bankruptcy filers and reporting results to community partners. Quantitative findings revealed significant increases in students’ personal social responsibility. Qualitative findings shed light on growth in personal social responsibility, civic awareness, policy advocacy, and personal values. Suggestions for future studies using RBSL pedagogy to teach social policy are discussed.

Payday Loans versus Pawn Shops: The Effects of Loan Fee Limits on Household Use

This paper uses data from the January 2009 FDIC Unbanked/Underbanked Supplement to the Current Population Survey (CPS) to examine how household use of payday loans and pawn shops is related to limits on loan fees set by states. We use information in the CPS to measure the relationship between household characteristics and payday loan and pawn shop usage and to control for these factors in examining the relationship between usage and state fee ceilings. We find little relationship between levels of fee ceilings in their current range and payday loan usage. Results for pawn shops indicate somewhat more variation in usage over the current range of pawn-shop fee ceilings. The results are generally consistent with conjectures that because of scale economies at the store level, payday lenders can adjust the scale of store operations to maintain profit margins and thus continue to lend over a range of fee ceilings. This finding suggests that lowering loan fee ceilings up to some point can benefit borrowers, many of whom report using these loan to meet basic living expenses or to make up for lost income.

In Sickness and in Debt: Do Mounting Medical Bills Predict Payday Loan Debt?

Cash-strapped families sometimes turn to small, short-term loans with exorbitant fees—payday loans—to cope with mounting medical bills. Given that about three-fourths of payday loan customers are repeat borrowers, consumer advocates and policymakers have increasingly raised voices of concern about the use of payday loans to finance various household expenses, including, among other things, medical bills. The present study hypothesized that increases in medical debt are associated with increases in payday loan debt among a sample of Chapter 7 bankruptcy filers. The results of a multivariate tobit regression analysis showed that medical debt was associated with increased payday loan debt, controlling for various types of debt and other socioeconomic variables. This article concludes with implications of the results for social work policy- and direct-practice.

Payday Mayday: Visible and Invisible Payday Lending Defaults

This paper uses two data sources to examine two indicators of distress in the payday lending context, both of which carry both immediate and cascading financial consequences for the borrower. The first is what we term a “visible default” — a default that is visible to both the borrower and the payday lender because the borrower fails to make a payment on the loan and the check or electronic payment that secures the loan bounces. The visible default rate should be considered a conservative measure of financial distress, however, as the borrower’s financial institution may allow a payment to go through even when there are insufficient funds in the account, charging an overdraft fee for doing so. As a result, this paper examines a second source of borrower distress, which occurs when the payment to the payday lender goes through because the bank covers it with an overdraft. We call this an “invisible default.”Key findings of our paper include: 1. Nearly half of all payday borrowers defaulted within two years of their first loan; 2. Of borrowers who defaulted, nearly half did so within the first two payday loans. 3.Default does not necessarily signal the end of payday borrowing, with many defaulters going on to repay their loan and even borrow (and possibly default) again at a later date. 4. Nearly one in five borrowers had a loan charged off by the lender. 5. One-third of payday borrowers experienced at least one invisible default in which their account was overdrawn on the same day that they made a payment to a payday lender. 6. For payday borrowers, overdrafts and bounced transactions frequently occurred close in time to the use of payday loans. Nearly half of payday borrowers incurred an overdraft or NSF fee in the two weeks after a payday loan transaction, and 64% paid overdraft or NSF fees at some point.

Food on the Fringe: Food Insecurity and the Use of Payday Loans

We examine how payday loan access and use relates to food-related material hardship with a sample of nonelderly households in both the December 2008 and January 2009 Current Population Surveys (CPS). We find that state legislation limiting access to payday loans increases the prevalence of our marginal food security measure by 1.4 percentage points and the probability of reporting that more money is needed for food (food inadequacy) by 2.3 percentage points. Further analyses using state payday loan limits as an instrumental variable suggest that using payday loans helps protect some households from food insecurity, especially those at the cusp of food insecurity. Our findings suggest that many households that are at risk for food insecurity face an unmet need for short-term credit and that improved credit access could reduce food insecurity and improve well-being.

Payday Loan Use and Consumer Well-Being: What Consumers and Social Workers Need to Know About Payday Loans

Individuals with limited or no access to checking accounts rely on alternative financial services (AFS) to navigate today’s economy. One AFS product that arguably is the most controversial is the payday loan—a small, short-term, high-interest loan. Although potentially assisting financially fragile individuals to fulfill their short-term credit needs, payday loans likely expose them to greater financial vulnerability. Despite the significance of issues related to financially fragile individuals, payday lending is largely understudied in social work. This article describes the payday loan industry, payday loan consumers, the consequences of payday loan use, and implications for social work advocacy.

Assessing the Optimism of Payday Loan Borrowers

This Article 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 percent 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.

Introduction to Symposium on Behavioral Law and Economics

We are pleased to present in this volume of Supreme Court Economic Review a symposium on behavioral law and economics. Most of the papers presented herein were originally written and presented at a conference co-sponsored by the George Mason Law and Economics Center and the Liberty Fund and held in Captiva Island February 2012.1 In addition, the papers have been supplemented by additional papers related to the topic. Taken together, the papers included here present one of the most comprehensive and far-reaching analyses of the current state of behavioral law and economics. In particular, unlike many prior collections of papers on behavioral law and economics, the papers collected here include a wide variety of perspectives, from both enthusiasts for the behavioral law and economics research paradigm, as well as others who draw more skeptical conclusions. In addition, the papers presented here rely heavily on empirical analysis, as opposed to the anecdotal and non-empirical nature of much behavioral law and economics research. The variety of perspectives represented here appraise the current state of knowledge of behavioral law and economics and identify some of the challenges for the research paradigm going forward. The volume starts off with an overview essay by Thomas S. Ulen, one of the founding fathers of behavioral law and economics, Behav-

An Experimental Analysis of the Demand for Payday Loans

Abstract The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. We design an environment similar to the one that payday loan customers face and then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals’ abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of financial survival in our experiment. We also test the degree to which people’s use of payday loans affects their ability to survive financially. We find that payday loans help the subjects to absorb expenditure shocks and therefore survive financially. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.

An Experimental Analysis of the Demand for Payday Loans

The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. The purpose of our study is to design an environment similar to the one that payday loan customers face. We then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals' abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of survival in our experiment. We also test the degree to which people's use of payday loans affects their ability to survive financial shocks. We find that payday loans help the subjects to absorb expenditure shocks and, therefore, survive. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.