What do High-Interest Borrowers do with Their Tax Rebate?

Abstract

Building on prior literature that constrained individuals consume the most out of a tax rebate, we study the tradeoffs high interest borrowers face when they received their 2008 tax stimulus checks. We find a persistent decline in payday borrowing in the pay cycles that follow the receipt of the tax rebate. The reduction in borrowing is a significant fraction of the mean outstanding loan (12%) and appears fairly persistent over the time, but is moderate in dollar magnitude (about $35) relative to the size of the rebate check ($600 per person). In trying to reconcile this finding with the cost of not retiring expensive payday debt, we find substantial heterogeneity across borrowers. Among individuals that we classify as temptation spenders (e.g. those that use 400% APR loans to buy electronic goods or go on vacation), we find no reduction in payday borrowing after the tax rebate is issued, but this group represents only a small fraction of payday borrowers. A second group for which we find no debt retirement post-check is the set of borrowers that appear to use what should be short-term payday loans as a long-term financing solution. We infer that the marginal use of the tax rebate for this group was to deal with regular monthly obligations, such as paying down late utility bills or making rent payments.