Association for Public Policy Analysis & Management

Payday loans can both help and harm consumers. On one hand, payday loans are a convenient form of short-term financing for credit-constrained consumers who face a negative income shock. However, exceptionally high annual percentage rate on a typical payday loan often restrains borrowers’ ability to repay, thereby ensnaring them in a debt trap. Consequently, the borrowers rearrange their finances, miss payments, and/or possibly file for bankruptcy. A number of states have found the latter argument convincing, especially in recent times: between 2009 and 2011, four states—Arizona, Arkansas, New Hampshire, and Montana—effectively banned payday lending by implementing an interest-rate cap on small loans. In this paper, we use these state regulations as quasi-experiments to investigate how access to payday credit affects delinquencies and bankruptcies. Because of the small number of recently banning states vis-à-vis the number of non-banning states, we perform a synthetic control analysis for each of the four treated states. We show that while the interest-rate cap was effective at decreasing payday lending in each state, there is weak evidence of any effect on delinquencies and bankruptcies. The results from New Hampshire are expected to be particularly convincing since it was surrounded by regions that banned payday lending throughout the study period (2001-2016). These findings are consistent with the extant literature, which indicates that payday loans do not materially affect the financial health of borrowers. Furthermore, a statistically significant increase in pawnshop usage in the recently-banning states indicates that payday lending bans channel consumers into higher-cost alternatives.