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Spillovers From Costly Credit

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  • Brian T. Melzer
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    Abstract

    Recent research on the effects of credit access among low- and moderate-income households finds that high-cost payday loans exacerbate, rather than alleviate, financial distress for a subset of borrowers (Melzer 2011; Skiba and Tobacman 2011). In this study I find that others, outside the borrowing household, bear a portion of these costs too: households with payday loan access are 20% more likely to use food assistance benefits and 10% less likely to make child support payments required of non-resident parents. These findings suggest that as borrowers accommodate interest and principal payments on payday loan debt, they prioritize loan payments over other liabilities like child support payments and they turn to transfer programs like food stamps to supplement the household’s resources. To establish this finding, the analysis uses a measure of payday loan access that is robust to the concern that lender location decisions and state policies governing payday lending are endogenous relative to household financial condition. The analysis also confirms that the effect is absent in the mid-1990s, prior to the spread of payday lending, and that the effect grows over time, in parallel with the growth of payday lending.

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    File URL: ftp://ftp2.census.gov/ces/wp/2013/CES-WP-13-11.pdf
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    Bibliographic Info

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 13-11.

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    Length: 24 pages
    Date of creation: Mar 2013
    Date of revision:
    Handle: RePEc:cen:wpaper:13-11

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    1. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports, Federal Reserve Bank of New York 309, Federal Reserve Bank of New York.
    2. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 2108-31, August.
    3. Carolyn J. Heinrich & Brett C. Burkhardt & Hilary M. Shager, 2011. "Reducing child support debt and its consequences: Can forgiveness benefit all?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 30(4), pages 755-774, 09.
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