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The Real Costs of Credit Access: Evidence from the Payday Lending Market

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  • Brian T. Melzer
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    Abstract

    Using geographic differences in the availability of payday loans, I estimate the real effects of credit access among low-income households. Payday loans are small, high interest rate loans that constitute the marginal source of credit for many high risk borrowers. I find no evidence that payday loans alleviate economic hardship. To the contrary, loan access leads to increased difficulty paying mortgage, rent and utilities bills. The empirical design isolates variation in loan access that is uninfluenced by lenders' location decisions and state regulatory decisions, two factors that might otherwise correlate with economic hardship measures. Further analysis of differences in loan availability--over time and across income groups--rules out a number of alternative explanations for the estimated effects. Counter to the view that improving credit access facilitates important expenditures, the results suggest that for some low-income households the debt service burden imposed by borrowing inhibits their ability to pay important bills. Copyright 2011, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

    Volume (Year): 126 (2011)
    Issue (Month): 1 ()
    Pages: 517-555

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    Handle: RePEc:oup:qjecon:v:126:y:2011:i:1:p:517-555

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    Cited by:
    1. Agarwal, Sumit & Ben-David, Itzhak & Amromin, Gene & Chomsisengphet, Souphala & Evanoff, Douglas D., 2012. "Predatory Lending and the Subprime Crisis," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2012-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    2. Andra Ghent, 2014. "Are Young Borrowers Bad Borrowers? Evidence from the Credit CARD Act of 2009," 2014 Meeting Papers, Society for Economic Dynamics 130, Society for Economic Dynamics.
    3. Richard W. Evans, 2012. "Determinants of Short-term Consumer Lending Interest Rates," BYU Macroeconomics and Computational Laboratory Working Paper Series, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory 2012-07, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
    4. Campbell, Dennis & Asís Martínez-Jerez, F. & Tufano, Peter, 2012. "Bouncing out of the banking system: An empirical analysis of involuntary bank account closures," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(4), pages 1224-1235.
    5. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, Springer, vol. 116(3), pages 513-527, September.
    6. Teng Sun, Stephen & Yannelis, Constantine, 2013. "Credit Constraints and Demand for Higher Education: Evidence from Financial Deregulation," MPRA Paper 48726, University Library of Munich, Germany.
    7. Taylor J. Canann & Richard W. Evans, 2013. "Determinants of Short-term Lender Location and Interest Rates," BYU Macroeconomics and Computational Laboratory Working Paper Series, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory 2013-06, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
    8. McKernan, Signe-Mary & Ratcliffe, Caroline & Kuehn, Daniel, 2013. "Prohibitions, price caps, and disclosures: A look at state policies and alternative financial product use," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 95(C), pages 207-223.
    9. Li, Mingliang & Mumford, Kevin J. & Tobias, Justin L., 2012. "A Bayesian analysis of payday loans and their regulation," Journal of Econometrics, Elsevier, Elsevier, vol. 171(2), pages 205-216.
    10. Renuka Sane & Susan Thomas, 2013. "The real cost of credit constraints: Evidence from micro-finance," Indira Gandhi Institute of Development Research, Mumbai Working Papers, Indira Gandhi Institute of Development Research, Mumbai, India 2013-013, Indira Gandhi Institute of Development Research, Mumbai, India.
    11. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2012. "Can an interest-free credit facility be more efficient than a usurious payday loan?," Working Papers, Bangor Business School, Prifysgol Bangor University (Cymru / Wales) 12008, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    12. Peter Debbaut & Andra C. Ghent & Marianna Kudlyak, 2013. "Are young borrowers bad borrowers? Evidence from the Credit CARD Act of 2009," Working Paper, Federal Reserve Bank of Richmond 13-09, Federal Reserve Bank of Richmond.
    13. Fourcade, Marion & Healy, Kieran, 2013. "Classification situations: Life-chances in the neoliberal era," Accounting, Organizations and Society, Elsevier, vol. 38(8), pages 559-572.
    14. Annamaria Lusardi & Carlo de Bassa Scheresberg, 2013. "Financial Literacy and High-Cost Borrowing in the United States," NBER Working Papers 18969, National Bureau of Economic Research, Inc.
    15. Alex Kaufman, 2013. "Payday lending regulation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-62, Board of Governors of the Federal Reserve System (U.S.).

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