A Bayesian analysis of payday loans and their regulation

Li, Mingliang; Mumford, Kevin J.; Tobias, Justin L.

doi:10.1016/j.jeconom.2012.06.010

Cited by 12 publications

(7 citation statements)

References 30 publications

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“…To study the policy implications of changing the number of rollovers allowed, Li, Mumford, and Tobias () use online payday loan data to simulate the effect of changing state laws from allowing unlimited rollovers to allowing no rollovers. They estimate that this change would have no impact on the size of the loan taken out and would slightly decrease the probability of default.…”

Section: Background On Payday Loans and Pawnshopsmentioning

confidence: 99%

Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan Rollovers

Carter¹

2015

Journal of Consumer Affairs

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Millions of US households rely on payday loans and pawnshops for short-term credit. Payday loan interest rates are as high as 25% per 2-to 4-week loans and individuals use a post-dated check to secure the loan. Pawnshop usage is available for anyone with collateral. This article examines whether individuals using payday loans in states where rollovers are allowed are more likely to also use pawnshops together with payday loans. I find that this is true for individuals who make less than $30,000, but it does not hold for those with higher levels of income. There may be some complementary relationships between payday loan rollovers and pawnshops for these lower-income individuals. These results are important when considering whether to allow payday loan rollovers."WARNING: A small loan is not intended to meet long term financial needs. A small loan should be used only to meet short term cash needs." 1 Despite regulators forcing payday lenders to post this announcement, borrowers often do not heed the warning and extend their payday loans for months by paying the interest on the loan and prolonging repayment until the next period-a process called "rolling over." The practice of rolling over payday loans is popular, and 25 states have now prohibited rollovers on payday loans. 2

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Section: Background On Payday Loans and Pawnshopsmentioning

confidence: 99%

Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan Rollovers

Carter¹

2015

Journal of Consumer Affairs

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“…Dobbie and Skiba (2013) find that 19% of initial payday loans go into default. The adverse selection that Dobbie and Skiba find in their data is even worse in the online payday lending market: Li, Mumford, and Tobias (2012) find that the default rate from an online lender was 28%; Rigbi (2013) finds a default rate of 19.4%.…”

Section: Are Interest Rate Caps An Effective Payday Ban?mentioning

confidence: 96%

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

Dasgupta

Mason

2020

Journal of Banking & Finance

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Citing consumer protection concerns, New Hampshire-along with three other states-recently banned payday lending by implementing an APR cap on small loans. New Hampshire presents a compelling quasi-experiment: its neighbors already had a payday loan ban in place. Hence, New Hampshire consumers were completely shut out of the storefront payday loan market. We perform a synthetic control analysis for all four of the recently-banning states. Our results show that, on the aggregate, bankruptcies are largely unaffected by the bans. Our New Hampshire results are characterized by an initial rise in bankruptcies after the ban, followed by a fall. This is consistent with the notion that payday bans hurt credit-constrained consumers in the short-run, but could help them in the long-run. We also analyze survey data of payday borrowers and find that while bankruptcies are unaffected, consumers substitute toward paying their credit card bills late and using pawnshops.

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“…Consistent with concerns about debt spirals, Burke et al (2014) report that consumers renew 82% of payday loans within 14 days and Skiba and Tobacman (2019) suggest that payday loans may lead to bankruptcy. Using a structural model, Li et al (2012) examine how limiting “rollovers,” or repeat loans, would affect consumers. They find that limiting payday loan rollovers slightly increases default risk, as forcing consumers to repay in full makes them more likely to default.…”

Section: Literature Reviewmentioning

confidence: 99%

Repeat use of short‐term credit: The case of deposit advance products

Chin

Romeo²

2022

Journal of Consumer Affairs

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Every day, consumers borrow using short‐term credit products. Relatively little is known about “Deposit Advance Products” (DAP), short‐term, small‐dollar loans offered to checking account customers. We examine (1) how DAP borrowing changes with repeat use and (2) how consumers use DAP in conjunction with other credit. By analyzing transaction‐level data on more than 100,000 checking accounts over an 18‐month period, we find that consumers' DAP borrowing evolves. With repeat borrowing, consumers take credit for a longer time, increasingly withdraw new loans within a week of repaying prior ones, and borrow more. Additionally, consumers with repeat DAP use are more likely to simultaneously borrow using overdraft. Together, this evidence suggests that DAP may provide inadequate credit for consumers. We discuss implications for the short‐term credit market.

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A Bayesian analysis of payday loans and their regulation

Cited by 12 publications

References 30 publications

Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan Rollovers

Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan Rollovers

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

Repeat use of short‐term credit: The case of deposit advance products

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