Arnold Kling  

Payday Lending

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John Caskey writes


In an ideal experiment, one would randomly grant payday loans to a group of applicants and randomly deny the loans as well as close substitutes to a similar group of applicants. One would then track indicators of financial stress over time across the two groups.

This is to answer the question of whether payday lending helps customers or hurts them. The idea is to use an experiment, as opposed to a priori theory or some parameterized model.

I favor more of this approach in economics.

Thanks to the indispensable Timothy Taylor for the pointer.

[UPDATE: a commenter points to a blog post by Paige Marga Skiba that describes a paper that looks at people near the borderline between approval and non-approval for a loan. Those who were not approved were better off. I have not read the paper, but the approach seems sensible.]


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CATEGORIES: Economic Methods



COMMENTS (6 to date)
Daniel Kuehn writes:

See page 5 and 6 of our report on alternative financial services: http://www.usfinancialcapability.org/download/412306-Prohibitions-Price-Caps-and-Disclosures.pdf

We didn't find any experimental tests that I can recall, but there are several quasi-experimental cases that may be of interest to you. Some set-ups are more convincing than others, but that's the nature of the quasi-experimental literature. It's generally messy so you look to corroborate findings.

Jonathan Bechtel writes:

Here's a good paper in favor of payday loans:

Do payday loans hurt borrowers?

Basically....in states where payday loans are outlawed borrowers don't turn to traditional forms of credit. They pay more bounced check fees and similar charges. Their credit score also goes down because of late payments, squeezing off access to lower-cost forms of credit.

Here's an interesting paper with a lot of data on two payday lending companies:
Information Asymmetries in Payday Lending

Both are good reads.

HH writes:

Arnold,

One of my old professors actually did something close to this. Here's the blog entry (link to a paper there).

http://www.creditslips.org/creditslips/2008/03/do-payday-loa-1.html

To quote the methodology: "Payday loans are approved/denied based on a special credit score (different from a FICO score). Using personal bankruptcy filings as a proxy for financial stress, we compare filing rates for individuals in Texas who were just barely approved to borrow on payday loans with the rates of those who were just barely denied."

PrometheeFeu writes:

That experiment won't work. You need to randomly grant or deny payday loans to people who would otherwise have all been granted the loan. Nobody cares about the effects of payday loans on people who normally aren't able to get them. Also, good luck getting that experiment done. Payday loans are applied for by people in a state of high financial distress. How can you get your "denied" group to no cheat and go get a payday loan from someone else? Experimentation is great, but it's not always feasible.

Charles R. Williams writes:

Why should the government allow payday loans? Usury should be illegal! The poor should use pawn shops and loan sharks.

Seriously, the controversy over pay day loans strikes me as eliminating poverty by outlawing the poor.

Seth writes:

The measure of "better off" is financial stress?

That might be how you or I would make this subjective determination, but it may not be how the applicants view it. It if it were, I imagine many of them wouldn't find themselves in the position to be applying for payday loans.

Payday lending is a great example where some groups of people cannot seem to resist the temptation to impose their personal value preferences on other groups.

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