Installment Loans

Abstract

Installment loans have increasingly replaced traditional payday loans in the short-term, small-dollar credit market. Installment loans, often offered by the same lenders who provide payday loans, have larger principal amounts, longer repayment periods, and lower interest rates relative to payday loans. Installment loan advocates and some regulators contend that these differences make the loans a more sustainable alternative. We use a dataset from a lender providing installment loans in Tennessee to better understand the effect that borrowing on these larger loans has on consumers using a regression-discontinuity design. Our results suggest that an exogenous increase in loan size of about $170 causes a $600 increase in total subsequent indebtedness. The welfare effects of our results are ambiguous. Because we do not observe increased defaults or late payments, greater indebtedness could occur because borrowers find installment loans to be a sustainable source of credit that allows them to effectively consumption smooth.

JEL Classification: d12, d14