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Can payday loan bans and financial literacy benefit consumers?

Author

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  • McKee, Eric
  • Solis, Oscar
  • Zhang, Wei

Abstract

By exploiting variation in the payday loan availability induced by state-level regulation changes, we investigate the impact of payday loan bans on consumers’ credit outcomes and financial welfare. We find that consumers in states with new bans significantly reduced the usage of payday loans and alternative financial services (AFS) and experienced a lower likelihood of difficulty in paying bills and mortgages relative to those in other states. Furthermore, both the credit and welfare effects are stronger for consumers with lower levels of financial literacy. These individuals experienced greater reductions in payday loan and AFS usage, as well as economic hardship. In contrast, high-literacy consumers used payday loans less in the first place and derived fewer benefits from the bans. Our results highlight the important role of financial literacy in mitigating the adverse effects of payday loans.

Suggested Citation

  • McKee, Eric & Solis, Oscar & Zhang, Wei, 2025. "Can payday loan bans and financial literacy benefit consumers?," Finance Research Letters, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:finlet:v:79:y:2025:i:c:s1544612325005896
    DOI: 10.1016/j.frl.2025.107326
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    More about this item

    Keywords

    Financial literacy; Payday loans; Alternative financial services; Financial welfare;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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