Do Payday Loans Trap Consumers in a Cycle of Debt?

42 Pages Posted: 17 Nov 2011  

Marc Anthony Fusaro

Arkansas Tech University - School of Business

Patricia J Cirillo

Cypress Research Group

Date Written: November 16, 2011

Abstract

It is estimated that payday lenders made $40 billion of loans in 2010. But these loans are controversial, with one of the politically charged claims being that the high interest rates on payday loans trap consumers in a “cycle of debt.” We test this claim by conducting a field experiment whereby a random sample of borrowers are given interest-free payday loans. We then track these loans and find no difference in loan repayment rates between this treatment group and a control group of borrowers who paid conventional payday-loan interest rates. This result forms strong evidence that high interest rates on payday loans are not the cause of a “cycle of debt.”

Keywords: payday loan, cycle of debt, household finance, controlled field experiment

JEL Classification: D14, D18, G28

Suggested Citation

Fusaro, Marc Anthony and Cirillo, Patricia J, Do Payday Loans Trap Consumers in a Cycle of Debt? (November 16, 2011). Available at SSRN: https://ssrn.com/abstract=1960776 or http://dx.doi.org/10.2139/ssrn.1960776

Marc Anthony Fusaro (Contact Author)

Arkansas Tech University - School of Business ( email )

United States

Patricia Jeanne Cirillo

Cypress Research Group

16871 Chagrin Blvd, # 549
Shaker Heights, OH 44122
United States
2162959764 (Phone)

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