Panel Paper: The Difference a Day Makes: The Impact of Payday Loan Length On Probability of Repayment

Saturday, November 10, 2012 : 3:30 PM
Hopkins (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Susan Carter1, Paige Skiba1 and Justin Sydnor2, (1)Vanderbilt University, (2)University of Wisconsin - Madison

Thirty-seven states allow payday loans: small-dollar, short-term credit with typical annualized interest rates of 500 percent.  These loans are controversial and are subject to an increasing number of regulations.  One of the most common regulations is that states tend to set minimums on the amount of time a borrower has to repay a loan.  We use a data set from a large payday lender to study how the length of loans affects repayment and default behavior. Two features of payday lending give us plausibly exogenous variation in loan length: 1) loans are always due on a borrower’s payday and 2) borrowers cannot take out a loan for fewer than either seven or 14 days depending on the state. These features mean similar borrowers have different loan durations. We implement a regression-discontinuity approach to estimate the impact longer loan durations have on repayment rates. Simple models of borrowing in response to temporary consumption or income shocks would suggest that offering more time to repay would improve the likelihood of repayment.  On the other hand, it is not obvious that longer loans will increase repayment by people who are naive present biased or generally inattentive and thus borrow as part of an ongoing struggle with their finances. We find that longer loan durations do not significantly impact repayment rates.