Do Payday Loans Trap Consumers in a Cycle of Debt?
42 Pages Posted: 17 Nov 2011
Date Written: November 16, 2011
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
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