Do Defaults on Payday Loans Matter?

32 Pages Posted: 6 Feb 2015 Last revised: 10 Feb 2015

See all articles by Ronald J. Mann

Ronald J. Mann

Columbia University - Law School

Date Written: December 1, 2014


This essay examines the effect on a borrower’s financial health of failure to repay a payday loan. Recent regulatory initiatives suggest an inclination to add an “ability to pay” requirement to payday-loan underwriting that would be fundamentally inconsistent with the nature of the product. Because the premise of that regulation would be that borrowers suffer harm when they fail to repay such a loan, it is timely to examine the after-effects of such a default empirically. This essay examines that question using a dataset that combines payday borrowing histories with credit bureau information.

The essay uses a difference-in-difference approach, comparing the credit-score change over time of those who default to the credit score change over the same period of those who do not default. The essay presents three principal findings. First, credit score changes for borrowers who default on payday loans differ immaterially from changes for borrowers who do not default on payday loans. Second, the fall in the year of the default plainly overstates the net effect of the default, because the credit scores of those who default on payday loans experience disproportionately large increases for at least two years after the year of the default. Third, the payday loan default cannot be regarded as the cause of the borrower’s financial distress; borrowers who default on payday loans have experienced disproportionately large drops in their credit scores for at least two years before their default.

Keywords: Consumer Finance, Payday Lending, Financial Health, Credit Scores

JEL Classification: D1, K35

Suggested Citation

Mann, Ronald J., Do Defaults on Payday Loans Matter? (December 1, 2014). Columbia Law and Economics Working Paper No. 509, Available at SSRN: or

Ronald J. Mann (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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