Installment Loans

23 Pages Posted: 29 Dec 2019 Last revised: 5 Feb 2020

See all articles by Carlie Malone

Carlie Malone

Vanderbilt University, Law School, Law and Economics, Students

Paige Marta Skiba

Vanderbilt University - Law School

Date Written: December 2, 2019

Abstract

Unsecured Installment lenders offer high-interest credit to low-income, credit constrained consumers. Lenders typically extend $600 in cash to be paid back in equal monthly installments over 6-9 months at an annualized interest rate of around 125 percent. As state and federal regulations tighten on payday loans — another popular form of small-dollar credit — installment loans has become increasingly popular. Installment loans have larger principals than payday loans, give consumers a longer time to repay and come with lower APRs. Together these factors may be welfare enhancing for consumers relative to payday loans. We use a large dataset of administrative records from an installment lender operating in the Southeast to better understand the effect that borrowing on these larger loans has on consumers. The institutional features of the lender’s underwriting rules make this possible: there is a discontinuous jump in installment loan size eligibility (from $600 to $900) at annual income of $37,000. The first stage results of our regression-discontinuity design suggest that borrowers just above this threshold take-up about $170 in additional installment credit relative to similar borrowers earning just below $37,000 annually. Our preliminary results from this quasi-experiment suggest that this exogenous increase in loan size, holding income and other borrower characteristics constant, causes an increase in the total amount of subsequent debt taken out by more than $600 in the subsequent months. These initial findings suggest that the larger magnitude of installment loans may cause additional financial strain rather benefits to consumers.

Keywords: installment loans, consumer finance, regression discontiuity

JEL Classification: K35, D14

Suggested Citation

Malone, Caroline and Skiba, Paige Marta, Installment Loans (December 2, 2019). Vanderbilt Law Research Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=3497095 or http://dx.doi.org/10.2139/ssrn.3497095

Caroline Malone

Vanderbilt University, Law School, Law and Economics, Students ( email )

Nashville, TN
United States

Paige Marta Skiba (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-1958 (Phone)

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