Spillovers from Costly Credit

24 Pages Posted: 22 Mar 2013

See all articles by Brian Melzer

Brian Melzer

Federal Reserve Bank of Chicago

Date Written: March 1, 2013

Abstract

Recent research on the effects of credit access among low- and moderate-income households finds that high-cost payday loans exacerbate, rather than alleviate, financial distress for a subset of borrowers (Melzer 2011; Skiba and Tobacman 2011). In this study I find that others, outside the borrowing household, bear a portion of these costs too: households with payday loan access are 20% more likely to use food assistance benefits and 10% less likely to make child support payments required of non-resident parents. These findings suggest that as borrowers accommodate interest and principal payments on payday loan debt, they prioritize loan payments over other liabilities like child support payments and they turn to transfer programs like food stamps to supplement the household’s resources. To establish this finding, the analysis uses a measure of payday loan access that is robust to the concern that lender location decisions and state policies governing payday lending are endogenous relative to household financial condition. The analysis also confirms that the effect is absent in the mid-1990s, prior to the spread of payday lending, and that the effect grows over time, in parallel with the growth of payday lending.

Suggested Citation

Melzer, Brian, Spillovers from Costly Credit (March 1, 2013). US Census Bureau Center for Economic Studies Paper No. CES-WP-11. Available at SSRN: https://ssrn.com/abstract=2235766 or http://dx.doi.org/10.2139/ssrn.2235766

Brian Melzer (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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