Non-bank credit and food hardship: The association between payday loans, pawn loans, rent-to-own contracts and food hardship in households with children

Low- and moderate-income (LMI) households with children are at-risk for food hardship and may rely on short-term credit to meet their food needs. This research examines how the use of three types of non-bank credit – payday loans, pawn loans, and rent-to-own transactions – is associated with food insecurity, food insufficiency, and food inadequacy using households matched between the Current Population Survey’s Food Security Supplement and the Unbanked and Underbanked Supplement. It finds a strong association between the use of any non-bank credit and food hardship. Payday loan and pawn loan use, particularly for households that use these products more frequently, have a larger association with food hardship than use of rent-to-own transactions. When examining the self-reported reasons for using non-bank credit, households that use non-bank credit to pay for basic living expenses rather than for specific expenses, such as a repairs or childcare expenses, have a stronger association with food hardship. However, biprobit estimates are imprecise and do not establish a causal link between use of non-bank credit and food hardship. Policy should promote affordable credit, expand assistance to purchase food, and assist households in acquiring savings to address the food hardship experienced by households using AFS credit.