Does Payday Lending Catch Vulnerable Communities in a Debt Trap?

Abstract:     
Consumers can use loans to smooth consumption after suffering financial shocks. However, payday loans may catch some consumers in a debt trap that leads to financial collapse. Critics claim that payday lenders target minority and military communities, making these groups especially vulnerable to this trap. This article uses county-level data to test these claims. The results, like those of the existing literature, are mixed. Bankruptcy filings fall in counties with large military or minority communities after a state legalizes payday lending. Because this correlation might be due to states’ incentives in enacting payday lending laws, this article also tests the effect of a change in federal law that should have had a disparate impact according to the prior choice of state law. This second test provides results that less clearly contradict the debt-trap hypothesis.

Number of Pages in PDF File: 32

Accepted Paper Series