Despite continuous expansion of federal food assistance programs, food insecurity and hunger continue to affect many Americans. In 2011, 15% of American households did not have consistent access to food necessary to maintain healthy lifestyles. Economic theory suggests that households’ asset holdings and ability to borrow can provide protection from food insecurity during times of income instability.  

Evidence suggests that liquidity constraint increases hunger at all income levels, and the effect is strongest among poor households and those with incomes slightly above the Supplemental Nutrition Assistance Program (SNAP) eligibility threshold (Chang et al., 2012). This implies food assistance programs are being used by some households as an alternative to saving and borrowing. Also, financial management skills are associated with food security (Gundersen & Garasky, 2012).

Payday loans are unsecured short-term loans with expensive fees and high rates of interest. Although payday lenders may seem to provide an alternative outlet for financially-disadvantaged individuals to resolve temporary financial issues, the vast majority of users borrow repetitively for recurring expenses such as rent, food, or utilities, likely resulting in greater hardship than their initial situation that necessitated the loan (Bourke et al., 2012). Access to payday loans, in fact, aggravates consumption hardship, and families in payday loan prohibiting states are more likely to cut meals if they live in counties that border a permissive state (Melzer, 2011).

While there are indications that payday loan access can harm food security, the literature is sparse on the topic. This study examines how access to payday loans affects household food insecurity and participation in SNAP.  Because fifteen U.S. states have banned payday loans and several others have instated interest rate caps sometime during the last few decades, resulting policy differences by state and year provide natural experiment for our study.

Our analysis sample includes households with incomes below 185% of the poverty threshold from the Current Population Survey. Food insecurity is a dummy determined by the number of affirmative answers to the 18 core food security questions. Payday loan policy variables generated from state legal statutes are merged to our data based on the year of survey and state of residence. The state border data set which includes border county identification and distance to the nearest state border are also merged to our data. Because most payday bans went into effect during the 2000s, we use data for years 2000-2011.

The effects of access to payday loan on food insecurity and on SNAP participation are assessed as difference-in-differences Probit estimators. Access to payday loans are defined by living in a state that allows payday loans or has a high or no cap on interest, as well as living in a border county neighboring a permissive state. Regressions control for demographics that are known to affect food insecurity and SNAP participation, year fixed effects, and state fixed effects.  Preliminary analyses support that residence in permissive states is positively associated with greater insolvency and asset inadequacy, which in turn are positively associated with food insecurity and SNAP participation.