Payday Holiday: How Households Fare After Payday Credit Bans

49 Pages Posted: 26 Nov 2007 Last revised: 13 Jul 2011

See all articles by Donald P. Morgan

Donald P. Morgan

Federal Reserve Bank of New York

Michael R. Strain

American Enterprise Institute; IZA

Date Written: February 1, 2008


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 states where payday lending is permitted, 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.

Keywords: payday credit, consumer welfare, bounced-check protection, informal bankruptcy

JEL Classification: G21, G28, I38

Suggested Citation

Morgan, Donald P. and Strain, Michael, Payday Holiday: How Households Fare After Payday Credit Bans (February 1, 2008). Available at SSRN: or

Donald P. Morgan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Michael Strain

American Enterprise Institute ( email )

1789 Massachusetts Ave NW
Washington, DC 20036
United States


IZA ( email )

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