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

Abstract

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

The Influence of Financial Well‐Being on Pawnshop Use

“…More recently, researchers have used large data sets, including the 2009 Federal Deposit Insurance Corporation (FDIC) Unbanked/Underbanked Supplement to the Current Population Survey (Avery and Samolyk 2011;Carter 2015;Mills and Monson 2013), the 2009 TNS Global Economic Crisis Survey (Lusardi et al 2011), and the 2009 National Financial Capability Study (NFCS) (Lusardi and Scheresberg 2013;Robb et al 2015), to understand pawnshop use. The researchers largely examined the demographic characteristics of pawnshop users (or Alternative Financial Services users, which includes pawnshop users, in Mills and Monson, Lusardi and de Bassa Scheresburg, and Robb et al), agreeing that pawnshop use was associated with unemployment, lower education, being unmarried, and non-homeownership.…”

Payday Loan Choices and Consequences

“…Carter () provides detail regarding roll‐over bans, interest rate caps, and other state‐level regulations.…”

Small‐Dollar Credit Lending: The Effect of Financial Burden on Personal Asset Misvaluation

“…Such extensions and rollovers might occur if individuals are not “using full information or being rational when using (payday) loans,” as Carter (, 454) concludes. But why would consumers not seek all the information needed (Carter ) before accepting a small‐dollar credit loan? We suggest that being broke dampens cognitive processing, creating biased distortions in rational decision making.…”

“…The findings illuminate how financial burdens can cause cognitive biases in the borrowing process. In line with recent scholarship into the consumer decision-making processes of those facing financial burden (Carter 2015;Hill and Kozup 2007), this research also seeks to answer why consumers might accept unfavorable lending terms involving higher interest rates and higher LTV ratios.…”

“…During and following the 2008 economic crisis, an increased number of consumers facing financial burden coincided with a growth in lending opportunities not falling under traditional mortgage, auto, or credit card lending domains. While the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 swiftly protected consumers from questionable mortgage, auto, and credit card lending practices, it also pushed many of these vulnerable consumers seeking credit opportunities outside traditional banking channels (Carter ; Kirsch, Mayer, and Silber ; Servon ). Shifting political ideologies have also raised significant questions of whether these consumer protections might be rolled back or remain unenforced.…”