Consumer Borrowing after Payday Loan Bans
In recent years, there has been an explosion in the number of measures to regulate payday loans, which typically carry extremely high-interest rates. On the other hand, it is still largely uncertain how borrowers will react to such laws. We analyze the effect that limits on payday loans have on consumer borrowing by utilizing both administrative data and survey data to take advantage of the difference in legislation governing payday lending.
We discovered that despite the fact that these policies are efficient at reducing payday lending, customers respond by diverting their attention to other forms of high-interest credit (such pawnshop loans), rather than regular credit instruments (for example, credit cards). Such shifting occurs, but to a lesser extent, for individuals who use payday loans and have the lowest incomes. According to the findings of our study, measures that focus just on payday lending may be inefficient at reducing consumers’ dependency on high-interest loans.
Introduction
In recent years, the business of providing payday loans has become the subject of considerable attention and severe investigation. Payday loans, which get their name from the fact that the borrower is required to repay the loan on the same day as his or her next salary, are frequently quite expensive. It is not uncommon for the annual percentage rate (APR) connected with these types of loans to reach triple digits. Payday loans, despite the high interest rates they carry, have seen a meteoric rise in popularity since the 1990s. Between the years 2000 and 2004, the number of payday loan stores increased by more than 100%. As of the year 2010, there were more establishments offering payday loans in the United States than there were locations of both Starbucks and McDonald’s combined.
Many people consider payday loans to be an example of predatory lending due to the extremely high interest rates associated with them. Critics assert that payday lenders seek out customers with low incomes who are so in need of financial assistance that they are willing to pay extremely high interest rates. The structure of the loans, according to these critics, takes advantage of customers by concealing the actual cost of borrowing money from them. Those who stand on the opposing side of the argument justify the high interest rates by pointing to the cost of lending to high-risk borrowers and by highlighting how beneficial it is for low-income households to have access to credit, regardless of how expensive it may be. In addition, proponents of payday lending argue that restricting access to payday loans will only cause consumers to turn to other forms of credit that are even more expensive, such as fines for failed checks or overdue payments.
Concerns about payday lending have led policymakers at both the state and federal levels to implement significant restrictions on the industry. As of the year 2006, eleven states had either outright banned or severely regulated payday lending, and by the year 2012, six more states and the District of Columbia had followed suit. Payday loans were made unavailable to members of the armed forces by regulations issued by the Department of Defense in 2007. These regulations took effect in 2007. More recently, the Consumer Financial Protection Bureau made an announcement that it too is contemplating the possibility of implementing new laws in this sector.
In spite of the increased focus that payday lending has received over the past several years, the policy debate has been impeded by a paucity of empirical research on many of the most fundamental topics about the demand for payday loans. There are not many data sets that quantify the use of payday loans, and the ones that do are often either narrow in scope or have too small of a sample size to provide answers to many of the concerns that are relevant to policy. Additionally, it is difficult to find plausibly exogenous variation in the usage of payday loans. People who use payday loans are likely to be different from those who do not use payday loans in ways that are not observable. As a consequence of this, significant fundamental questions regarding payday lending continue to be unsolved.
In this article, we make an attempt to shed some light on one of the most fundamental yet largely unanswered questions regarding the utilisation of payday loans and the regulation of such loans. Namely, how does borrowing behaviour change when a state outlaws payday loans? It is essential, for multiple (interconnected) reasons, to have an understanding of how limitations on payday loans affect people’s propensity to borrow money. Knowing the answer to this issue is vitally important for policymakers who are debating whether or not and how to regulate payday lending from a practical standpoint. If banning payday lending only causes borrowers to turn to more expensive kinds of credit, then efforts to combat payday loans on their own may be ineffectual or even detrimental.
Second, gaining an understanding of how borrowing patterns shift as a result of the implementation of restrictions on payday lending can give information on the dynamics of the demand for payday loans. For instance, if payday loans are substitutes for other expensive sources of credit, this suggests that the underlying cause of payday borrowing is a general desire (whether rational or not) for short-term credit rather than some feature unique to the design or marketing of payday loans. This is because the general desire for short-term credit is the same regardless of whether the desire is rational or not. In conclusion, gaining a grasp of the effects that payday loan restrictions have on a more immediate result (specifically, borrowing behaviour) helps shed light on the extensive body of research that links access to payday loans to other outcomes (for example, credit scores and bankruptcies).
In a similar vein, the simple act of evaluating the extent to which limits on payday lending effect the amount of payday lending that occurs sheds light on what is now a significant unknown. Customers living in jurisdictions that outlaw payday lending have the option of borrowing from businesses located in other states, borrowing money online, or searching for lenders who are ready to circumvent the law. It is essential to have an understanding of the changes in payday lending that are connected with such prohibitions in order to evaluate and interpret a significant portion of the existing literature on payday lending, which ties payday loan regulations to other financial consequences.
In order to investigate this topic further, we make use of two new discoveries that have occurred recently. The first reason is that there is now access to a new data set. The National Survey of Unbanked and Underbanked Households, which is a supplement to the Current Population Survey and is conducted by the Federal Deposit Insurance Corporation (FDIC), is now available (CPS). The poll has a large sample size, is typical of the entire country, and offers in-depth information regarding the borrowing behaviour of consumers.
This poll is supplemented with information on traditional credit product utilisation obtained from the Federal Reserve Bank of New York and Equifax respectively. Second, in the past few years, a number of states have passed legislation that has made it illegal to get a payday loan. Utilizing a straightforward difference-in-differences research design, we take advantage of this policy heterogeneity to investigate the impact of shifts in the availability of payday loans for borrowers between states and over time.
Our research shows that prohibiting payday loans does not result in a reduction in the number of people who seek out loans from alternative financial services (AFS). After the prohibitions were implemented, a significantly lower number of people obtained payday loans; however, this decline has been partially offset by an increase in the number of customers who borrow from pawnshops. We also provide evidence that bans on payday loans are associated with an increase in involuntary closures of consumers’ checking accounts.
This pattern suggests that customers may switch from payday loans to other forms of high-interest credit such as bank overdrafts and bounced checks in order to make up for the shortfall caused by the ban on payday loans. On the other hand, the utilisation of traditional forms of credit, such as credit cards and consumer finance loans, is unaffected by legislation that prohibits payday lending. Finally, when we look at customers with the lowest incomes, we find that there is a lower degree of substitution between pawnshop loans and payday loans. This results in a net reduction in the amount of AFS credit product usage among this group after payday-lending bans are implemented.
Credit Products
Credit Products Provided by Alternative Financial Services
The term “alternative financial services” is used to refer to credit products and other forms of financial assistance that are provided by organisations that are not typical banks. A significant number of the credit products offered by AFS take the form of short-term loans with rather high interest rates. Payday loans, pawnshop loans, rent-to-own loans, and overdraft services are some examples of the AFS credit products that are available. These items are discussed in greater detail in the following sections (for more detailed descriptions, see Caskey 1994; Drysdale and Keest 2000).
Payday Loans
Payday loans are unsecured small-dollar consumer loans that are taken out for a short period of time. A consumer can receive a loan by providing a lender with a postdated check (or by authorising a delayed debit) for the amount of the loan’s principle as well as an additional fee that is proportional to the amount that they borrow. The date on which the loan must be paid back is predetermined, and the typical loan term is two to four weeks. This date typically coincides with the borrower’s next scheduled payday. The vast majority of loans have a range of values between $100 and $500, with an average value of $375. (Burtzlaff and Groce 2011).
The typical financing charge for a loan is $15, which means that the annual percentage rate (APR) for such a loan is just under 400 percent. This charge is assessed for every $100 that is borrowed over a period of two weeks. If a customer is unable to repay the loan by the date that was agreed upon, she has three options: she can pay an additional fee to roll over the loan, she can take out a new loan to cover the balance of the prior loan, or she can default on the loan. Despite the fact that customers are led to believe that payday loans are forms of short-term credit, the typical borrower remains in possession of a payday loan for a period of five months (Pew Safe Small-Dollar Loans Research Project 2012).
Customers are required to present the lender with documentation that verifies their income and have an active checking account in order to be eligible for a loan. It is important to note that payday lenders, in general, do not use a customer’s credit score into their decision making when it comes to giving money. Instead, lenders look at the potential borrower’s Teletrack score, which determines whether or not the potential borrower has a history of writing bad checks. As a consequence of this, payday loans have the potential to be an appealing type of credit product for those whose credit histories prevent them from being eligible for other types of credit products.
Loans from Pawnshops
Pawnshops, which have been around for centuries but have seen a steady rise in popularity over the past several decades, are a source of credit. It is estimated that there are now slightly more than 12,000 pawnshops operating in the United States. In 1985, there were approximately 5,000 of these establishments, but by 1992, that number had increased to 9,000 (Caskey 1994).
Pawnshop loans are similarly considered to be small-dollar, short-term loans; however, in contrast to payday loans, pawnshop loans require borrowers to secure their loans with some form of tangible collateral. A consumer will supply the lender with tangible personal property as collateral in exchange for receiving a cash loan based on the value of the collateral, which may include jewellery or electrical devices.
The fact that the amount of the loan from the pawnshop is often only a small fraction of the assessed value of the collateral ensures that the loan is secured in excess of its original amount. 3 Payday loans are more difficult to obtain than loans from pawnshops because the borrower of a pawnshop loan is not required to demonstrate ownership of a bank account or a regular source of income. Pawnshop loans are therefore more accessible to a wider population.
The typical loan amount from a pawnshop is roughly $100, which is significantly less than the typical loan amount from a payday lender. Pawnshop loans typically have a repayment period of one month and an average fee of $20 for every $100 that is borrowed. This translates to an annual percentage rate (APR) of approximately 250 percent. In the event that a customer of a pawnshop is unable to repay the loan that she has taken out, she is required to return the object that she has pawned to the lender so that they may resell it.
Rental-Purchase Loans
Rent-to-own stores, in contrast to payday lending outlets or pawnshops, do not provide clients the opportunity to borrow cash; rather, they enable customers to make purchases on credit. The item, which is often a long-lasting good like an electronic device, a piece of furniture, or an appliance, is delivered to the customer at one of the 8,000 rent-to-own outlets located around the country for immediate usage (Czerwonko 2012).
The cost of acquiring an item from a rent-to-own store on credit is significantly more than the cost of purchasing an item of a comparable nature from a traditional retailer. The annual percentage rate (APR) that is implicit in a purchase can range from as low as 57Protections against overdrafts
In addition to the AFS lenders that were discussed before, a significant number of conventional banks provide overdraft services to the consumers who use their checking accounts. The bank may let an account to be overdrawn when the owner of the account writes a check or allows a debit for an amount that is greater than the amount that is currently available in the account. In this scenario, the customer’s payment is processed by the bank (as if the customer had adequate cash), but the bank also charges the consumer an overdraft fee and requires the customer to reimburse the amount that was overdrawn.
Even when compared to the costs of other credit products offered by AFS, overdraft protection is a significant expense. Overdraft loans often come with interest rates and costs that are higher than the interest rates that payday lenders charge for modest loans. percent (Czerwonko 2012) to as high as 230 percent, according to estimates made by various researchers (Zikmund-Fisher and Parker 1999). Rent-to-own loans are secured in the same way as pawnshop loans are; if a customer is late with a payment, the lender has the right to reclaim the item that was rented to them.
Protections against overdrafts
In addition to the AFS lenders that were discussed before, a significant number of conventional banks provide overdraft services to the consumers who use their checking accounts. The bank may let an account to be overdrawn when the owner of the account writes a check or allows a debit for an amount that is greater than the amount that is currently available in the account.
In this scenario, the customer’s payment is processed by the bank (as if the customer had adequate cash), but the bank also charges the consumer an overdraft fee and requires the customer to reimburse the amount that was overdrawn. Even when compared to the costs of other credit products offered by AFS, overdraft protection is a significant expense. Overdraft loans often come with interest rates and costs that are higher than the interest rates that payday lenders charge for modest loans.
Other Alternative Methods of Acquiring Credit
Individuals are able to borrow against the future by delaying various payments past their due dates. This is in addition to the formal types of credit products that have been described above. For instance, customers may put off paying their utility bills or write checks that they anticipate will be returned unpaid. Borrowing in such forms is obviously not free: failing to pay one’s utility bills on time typically results in exorbitant late fees and may have a negative impact on a borrower’s credit score if the debt is sold to a collection agency; additionally, consumers who write checks that bounce may be subject to fines from their financial institution. In addition, financial institutions typically cancel the accounts of borrowers who participate in an excessive amount of activity involving nonsufficient funds or an excessive number of overdrafts.
Traditional forms of credit and financing
When we talk about traditional credit, we’re referring to the kinds of loans and lines of credit that are granted by mainstream financial institutions, such as banks and finance companies, as well as shops who are members of national credit-reporting systems. Individuals who already have established credit lines have the ability to quickly borrow smaller amounts through the use of bank-issued general purpose credit cards. This type of credit is the most common form of traditional credit. In recent years, the average annual interest rate on card accounts assessed interest has been in the range of 13–14 percent, according to data from the Federal Reserve; however, posted rates for riskier borrowers are often as high as 20–30 percent.
This is because riskier borrowers are more likely to default on their payments. In addition, additional costs may apply to particular transactions, such as cash advances, depending on the circumstances (for example, 3 percent of the amount advanced). People who have recently defaulted on their payments and therefore have very low credit scores (for example, a FICO score in the low 500s or lower) may have difficulty opening new credit card accounts, but they will still be able to access existing revolving accounts that were opened when their financial situation was in a better place.
Switching Between Different Credit Products
Because of the differences in how they are constructed, different types of credit products might or might not be interchangeable with one another for reasons that are not governed by regulations. To begin, there is a possibility that certain borrowers are willing to pay the interest that is required to obtain some types of loans, but not others. Pawnshops, for instance, force borrowers to expose themselves to the possibility of losing ownership of expensive things, which is something that some borrowers may be afraid to undertake. Second, it’s possible that some borrowers won’t be approved for certain kinds of loans. Some consumers are unable to qualify for traditional bank loans and credit cards due to the minimum and maximum credit score requirements, respectively.
In a similar vein, one needs a bank account in order to use an overdraft protection service, and one needs both a bank account and a source of income that is reasonably consistent in order to obtain a payday loan. Last but not least, even for those borrowers who have access to more than one sort of loan, there is a possibility that restricting access to loans will have a net negative effect on consumer demand. For instance, as will be demonstrated in the following section, borrowers who are denied payday loans might consider pawnshop loans as an alternative source of short-term credit. Pawnshop loans are discussed further below. On the other hand, borrowers who use payday loans may wind up taking out loans from pawnshops in order to assist them in meeting the interest obligations associated with their payday loans.
The Regulation of Payday Loans and Other High-Interest Credit Products
In recent years, there has been a significant shift in the way that states regulate payday lenders. Even though the majority of states have stringent usury laws that cap the maximum annual percentage rate (APR) that can be charged on cash loans at a rate that is significantly lower than the rate that is commonly charged for payday loans, several of these jurisdictions make exceptions for payday loans. In addition, until the year 2005, payday lenders were able to get around state laws prohibiting payday loans by using a legal loophole that existed in the national banking law.
This loophole gave them the ability to conduct business in states where payday loans were illegal. The regulation of payday lenders by states can take many different shapes in today’s world. Some states have laws that expressly prohibit payday lending, such as usury laws or racketeering statutes. However, other states have adopted regulations that effectively prohibit payday loans. These regulations cap interest rates at a level that is lower than the rate at which payday lenders are willing to do business. The usage of payday loans was made illegal in 11 states and the District of Columbia as of the beginning of the time period that our statistics cover, which was January 2006. (either directly through bans or indirectly through regulation).
Payday loans were made illegal in four different jurisdictions between the years 2006 and 2012. The District of Columbia passed a law in January 2008 that effectively banned payday loans by barring lenders from charging annual percentage rates (APRs) of more than 24 percent. The state of New Hampshire passed a law in March 2009 that caps annual percentage rates (APRs) for payday loans at 36 percent. Initially, Arizona exempted payday lending from the state’s maximum interest rate cap of 36 percent APR; however, this rule was allowed to “sunset,” which resulted in payday loans becoming unlawful as of July 2010, when it was permitted to take effect. Finally, in November of 2010, residents of Montana voted in favor of a ballot measure that set an annual percentage rate (APR) cap on the interest rate for payday loans at 36 percent.
Additional credit products offered by AFS are governed by state regulation. Pawnshop loans are subject to state regulation, namely regarding the maximum allowable interest rate and the maximum allowable length of the loan. However, unlike payday lenders, pawnshops continue to operate in states with even the most restrictive policies. This is because many states do not have any limits on the fees that can be charged, while other states have limits that are as low as $2 per $100 for a two-week loan.
On the other hand, rent-to-own businesses frequently have the ability to circumvent state rules on APR disclosure requirements or interest rate caps on the basis that the contracts that their clients sign are terminable whenever the customer chooses. A number of states have implemented laws mandating the publication of relevant information regarding rent-to-own products, such as the cash price and the overall cost to buy the item. During the time period that we looked at, there were no significant shifts in the regulations that govern pawnshops or rent-to-own loans at the state level.
Prior Literature
This section provides a concise summary of the rapidly expanding body of research on payday lending. In spite of the fact that the types of issues that may be investigated are restricted by the availability of data, previous research has produced a number of significant insights into the utilization of payday loans.
The Effect of Payday Loan Regulations on Payday Loan Use
There is a paucity of information regarding the utilization of payday loans; however, a few papers have attempted to estimate the impact that restrictions on payday loans might have on the utilization rates. Both Chanani (2011) and the Pew Safe Small-Dollar Loans Research Project (2012) explore the diversity that exists between states in terms of interest rate ceilings and conclude that these restrictions reduce the utilization of payday loans.
Carter (2015) demonstrates a similar tendency with regard to legislation that limit the ability of payday loan borrowers to roll over their loans. A difference-in-differences design was used by Zinman (2010) to analyze changes in borrowing behavior in Oregon after that state’s prohibition of payday lending. Zinman shows that inhabitants of Oregon were around 30 percent less likely to use a payday loan immediately after the prohibition by comparing their likelihood to that of residents of a nearby state who served as a control.
The Effect of Payday Loan Regulations on Financial Well-Being
The impact that having access to payday loans has on one’s overall economic well-being might be viewed as having mixed implications from a theoretical point of view. The neoclassical models show that customers choose payday loans when the terms of the loan are more favorable than the alternatives that are currently accessible. These models imply that limiting access would inevitably result in consumers being in a worse financial position.
On the other hand, behavioral models of payday loan usage imply that present bias, over-optimism, or other cognitive biases can induce consumers to take out payday loans even when doing so is suboptimal, as judged by the consumers’ own preferences. This is because consumers tend to overestimate their ability to pay back the loans, and they also tend to be overly optimistic about their chances of being approved. If these models accurately characterize consumer behavior, then limiting consumer access to payday loans could result in better financial outcomes for individuals.
The empirical research that has been done on the correlation between having access to payday loans and having a healthy financial situation has produced conflicting results. A number of studies conclude that having access to payday loans is beneficial to one’s overall financial situation. For instance, Zinman (2010) discovers evidence that the economic well-being of Oregonians has deteriorated since the state implemented restrictions on payday lending. In a similar vein, Morse (2011) argues that those who have recourse to payday loans have a lower risk of having their homes foreclosed upon them.
On the other hand, other people believe that having access to payday loans makes consumers’ existing financial problems much worse. Access to payday loans, according to the research of Skiba and Tobacman (2009), makes it more likely that an individual will file for bankruptcy. This conclusion was reached by exploiting a gap in the eligibility requirements for payday loans.
The findings of Carrell and Zinman (2014) indicate that having access to payday loans is associated with a decline in job performance. This may be the case if the use of payday loans exacerbates financial difficulties and stress. Melzer (2011, 2013) identifies the effect of access to payday loans by comparing individuals living in states that prohibit payday loans but differ in their proximity to a neighbouring jurisdiction where payday lending is legal.
In this way, he is able to determine the effect that access to payday loans has. He comes to the conclusion that having access to payday loans is associated with worse outcomes along a variety of measures of economic hardship. These measures include having difficulty paying bills, not having adequate food security, and delaying medical care due to costs. Hynes (2012) conducts research into the connection between the legality of payday loans and personal bankruptcy.
He reports mixed evidence, with the results differing depending on the identification strategy used. According to the findings of Lefgren and McIntyre (2009), differences in the legality of payday loans from state to state do not account for a significant portion of the variance in the rates at which states file for bankruptcy. Finally, Bhutta (2014) and Bhutta, Skiba, and Tobacman (2015) find that access to payday loans (whether on an individual basis or at the level of the state) appears to have very little to no effect on the long-term credit scores of consumers.
The Effect of Payday Loan Regulations on the Use of Other Credit Products
A number of articles have been published that investigate the relationship between having access to payday loans and making use of other types of high-interest products. Skiba and Tobacman (2007) give contradictory findings when it comes to the question of whether or not pawnshop loans and payday loans may be substituted for one another. They have discovered that individuals who are only narrowly denied payday loans as a result of low credit scores are more likely to take out a pawnshop loan within the next two days.
This is due to the fact that payday loans require higher credit scores. On the other hand, it does not appear that these people will be using loans from pawnshops in the foreseeable future. According to research conducted by Carter (2015), borrowers who take out payday loans are more likely to make use of pawnshops when the states in which they reside do not place restrictions on the number of times they can roll over their loans. She draws the conclusion from this pattern that payday borrowers use pawnshop loans to pay off the interest on their payday loans in order to roll over the debt rather than default on it.
Carter and Skiba (2011) provide additional support for this theory by presenting evidence that customers of payday loans who take out pawnshop loans within one day of the due date of their payday loan are more likely to roll over their payday loan. This finding lends further credence to the hypothesis that customers of payday loans are more likely to roll over their payday loan. Although these studies help explain patterns of use in states where both payday and pawnshop loans are legal, they do not address the question of how pawnshop borrowing reacts when access to payday loans is restricted statewide. Rather, they only help explain patterns of use in states where both types of loans are legal.
The evidence regarding the connection between payday loans and the use of overdrafts is similarly contradictory. Zinman (2010) discovered that after a restriction on payday loans, residents of states that had previously passed legislation to limit the availability of such loans were more likely to have their checks bounce. Melzer and Morgan (2009) come to the same conclusions regarding the income that banks make from overdraft fees.
Morgan, Strain, and Seblani (2012) come to the conclusion that payday loan bans lead to increased overdraft fee income as well as more checks that are returned. However, Campbell, Martinez-Jerez, and Tufano (2012) discover that a ban on payday loans in Georgia led to a reduction in involuntary checking-account closures. This is an outcome that is closely associated with bouncing too many checks, so this finding is particularly noteworthy. Bans on payday loans lead to a decrease in the use of refund anticipation loans (RALs), which suggests that the two products are complementary to one another. This similar result is found for the use of refund anticipation loans (RALs) by Galperin and Weaver (2014).
Credit in the Conventional Sense
Traditional credit products often have more stringent standards and larger loan size caps, but generally offer interest rates that are significantly lower than those of payday loans and other alternative financial services (AFS) credit products. Therefore, conventional economic models forecast that customers will only turn to payday loans when they have exhausted the limitations of traditional credit products or when they have never been qualified for such goods.
However, the results of surveys suggest that some people who use payday loans may move to using bank loans or credit cards if payday loans were no longer available (Pew Safe Small-Dollar Loans Research Project 2012). A preference for payday loans over traditional sources of credit may be because of some perceived advantage of payday loans that is not related to pricing. For some borrowers, the process of borrowing money from payday lenders, for instance, may be more convenient.
In addition, the utilisation of a payday loan is not reported on a customer’s credit report, which may be appealing to certain clients. A borrower’s uncertainty or lack of awareness about relative price differences could be another explanation for why they choose a payday loan rather than using a credit card. For instance, the interest rate on a payday loan is typically quoted as a rate for a period of two weeks (such as 15 percent), whereas the interest rate on a credit card is quoted as an annual rate that is numerically similar; as a result, customers may believe that the prices for these products are comparable to one another.
Few studies have investigated whether customers of payday loans shift toward the use of credit cards or other traditional credit products when access to payday loans is restricted. This is despite the fact that survey evidence suggests that payday loans may in fact be substitutes for traditional credit products rather than strictly inferior alternatives. According to the findings of Agarwal, Skiba, and Tobacman (2009), consumers who use payday loans still have a significant amount of available credit in their credit card accounts on the day of the loan.
This finding suggests that consumers who use payday loans have the option of switching to traditional credit sources in the event that access to payday loans is suddenly restricted. However, Bhutta, Skiba, and Tobacman (2015) discover, through the use of diverse data, that the majority of clients have already used up all of their available credit when they apply for their first payday loan. Our study contributes to the existing body of research in this field by investigating whether or not a state’s prohibition of payday loans results in an increase in the usage of three traditional forms of credit: credit card debt, retail card debt, and consumer finance loans.
Data
The FDIC’s National Survey of Unbanked and Underbanked Households is the primary source of the information that we use (US Census Bureau 2009, 2011, 2013). In addition to the Current Population Survey (CPS), the United States Census Bureau also conducts this survey. To this day, there have been three different waves of data collection for the survey: in January 2009, June 2011, and June 2013.
Due to the fact that no state altered its position on the permissibility of payday lending during the second and third rounds of data collection, our primary study is based on the first two waves of data. We make use of the third wave to analyse the effects of the bans over a longer period of time. A nationally representative sample of 46,547 households was included in the survey in 2009, 45,171 households were included in the survey in 2011, and 41,297 households were included in the survey in 2013.
The questionnaire for the poll contains questions concerning a household’s relationship to traditional banking systems, use of AFS, and respondents’ reasons for not having bank accounts or having accounts with a limited range of services. Participants in the survey were asked whether or not anyone in their home had taken out a payday loan, sold items at a pawnshop, or leased merchandise from a rent-to-own store in the previous twelve months. In the survey that was conducted in 2009, we classified a household as having used a payday loan in the previous year if the respondent gave a response that was greater than zero to the question, “How many times in the last 12 months did you or anyone in your household use payday loan or payday advance services?”
In a similar vein, we classify a household as having utilized the services of a pawnshop or rent-to-own loan within the previous year if the respondent to our survey provided an answer to the following question: “How frequently do you or anyone in your household sell items at pawnshops [do business at a rent-to-own store]?” with phrases such as “once or twice a year” or “at least a couple times a year.”
In the poll that was conducted in 2011, a household was considered to have utilized one of these AFS credit products if the respondent gave a positive answer to one of the following questions: “In the previous 12 months, have you or anybody in your household had a payday loan?” “In the previous year, have you or anybody else living in your household sold something in order to get cash when it was needed?” “In the previous year, have you or anyone else living in your household participated in a rent-to-own program?”