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Payday holiday: how households fare after payday credit bans

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  • Donald P. Morgan
  • Michael R. Strain

Abstract

Payday loans are widely condemned as a “predatory debt trap.” We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.>

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 309.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:309

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Related research

Keywords: Loans; Personal ; Debt ; Finance; Personal ; Households - Economic aspects ; Banking law ; Public welfare;

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Cited by:
  1. Scott Carrell & Jonathan Zinman, 2008. "In harm’s way? Payday loan access and military personnel performance," Working Papers 08-18, Federal Reserve Bank of Philadelphia.
  2. Dean Karlan & Jonathan Zinman, 2007. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Working Papers 956, Economic Growth Center, Yale University.
  3. Brian T. Melzer, 2013. "Spillovers From Costly Credit," Working Papers 13-11, Center for Economic Studies, U.S. Census Bureau.
  4. Renuka Sane & Susan Thomas, 2013. "The real cost of credit constraints: Evidence from micro-finance," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-013, Indira Gandhi Institute of Development Research, Mumbai, India.
  5. repec:reg:wpaper:631 is not listed on IDEAS
  6. Campbell, John Y. & Jackson, Howell E. & Madrian, Brigitte C. & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Working Paper Series rwp10-040, Harvard University, John F. Kennedy School of Government.
  7. Alex Kaufman, 2013. "Payday lending regulation," Finance and Economics Discussion Series 2013-62, Board of Governors of the Federal Reserve System (U.S.).
  8. John Y. Campbell & Howell E. Jackson & Brigitte C. Madrian & Peter Tufano, 2011. "Consumer Financial Protection," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 91-114, Winter.
  9. Robert DeYoung & Ronnie J. Phillips, 2013. "Interest rate caps and implicit collusion: the case of payday lending," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 121-158.
  10. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
  11. Marianne Bertrand & Adair Morse, 2011. "Information Disclosure, Cognitive Biases, and Payday Borrowing," Journal of Finance, American Finance Association, vol. 66(6), pages 1865-1893, December.
  12. Brian T. Melzer & Donald P. Morgan, 2009. "Price-increasing competition: the curious case of overdraft versus deferred deposit credit," Staff Reports 391, Federal Reserve Bank of New York.
  13. 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, vol. 36(4), pages 1224-1235.
  14. Wilson Bart J & Findlay David W. & Meehan James W. & Wellford Charissa & Schurter Karl, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, October.
  15. Marc Fusaro & Richard Ericson, 2010. "The Welfare Economics of “Bounce Protection” Programs," Journal of Consumer Policy, Springer, vol. 33(1), pages 55-73, March.

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