The Phenomenon of Repeat Payday Loan Borrowing in the United States: Assessing Risk and Protective Factors among the Financially Vulnerable

Abstract

Payday lenders provide high-cost short-term loans to those who have limited access to traditional financial institutions. Although an overwhelming majority of payday loan customers are repeat borrowers, studies examining the phenomenon of repeat borrowing is scant. Our study aimed to assess risk and protective factors among repeat payday loan borrowers. Using Bankruptcy filers' data obtained through the Public Access to Court Electronic Records database of the United States Bankruptcy Court of a Southern district, we conducted a multinomial logistic regression analysis to compare one-time and repeat borrowers with non-borrowers (N = 453). Findings revealed that medical debt and the number of children are associated with an increased risk of repeat borrowing. Homeownership is associated with a decreased risk of both one-time and repeat borrowing. In contrast, student loans are associated with an increased risk of one-time borrowing. Implications for social work practice, policy, research, and education to engage with financially vulnerable households, build assets and financial capability, and address risk and protective factors of alternative financial services such as repeat payday loan borrowing toward achieving socio-economic justice goals are discussed.

Examining payday loan utilization among households with mainstream credit access

“…Past research with U.S. data finds that close to 73% of payday loan users have at least one credit card and that 50% of those with credit cards have an available balance when they take a payday loan (Nuñez and Servon, 2016), suggesting that payday loans may be used strategically to benefit the household. Other research finds that payday loans are largely used to cover emergencies and regular expenses, which include paying outstanding debt such as utility bills, credit card debt, car payments, medical debt and student loans (Lim et al. , 2022; Lamb, 2016; Nuñez and Servon, 2016).…”

“…paying outstanding debt such as utility bills, credit card debt, car payments, medical debt and student loans (Lim et al, 2022;Lamb, 2016;Nuñez and Servon, 2016). This provides further evidence that the choice to use a payday loan is not necessarily an irrational decision, given that defaulting on a formal debt payment such as a student loan or car payment adversely affects credit scores.…”