How do payday loans affect borrowers?: evidence from the UK market

Gathergood, John; Guttman-Kenney, Benedict; Hunt, Stefan

Abstract

Payday loans are controversial high cost, short-term lending products, banned in many US states. But debates surrounding their benefits to consumers continue. We analyse the effects of payday loans on consumers using a unique dataset including 99% of loans approved in the UK over a two-year period matched to credit files. Using a Regression Discontinuity research design, our results show payday loans provide short-lived liquidity gains and encourage consumers to take on additional credit. However, in the following months, payday loans cause persistent increases in defaults and cause consumers to exceed their bank overdraft limits.

Citation

Gathergood, J., Guttman-Kenney, B., & Hunt, S. (2019). How do payday loans affect borrowers?: evidence from the UK market. Review of Financial Studies, 32(2), 496–523. https://doi.org/10.1093/rfs/hhy090

• Journal Article Type: Article
• Acceptance Date: Jun 30, 2018
• Online Publication Date: Aug 13, 2018
• Publication Date: Feb 1, 2019
• Deposit Date: Jul 11, 2018
• Publicly Available Date: Mar 4, 2019
• Journal: Review of Financial Studies
• Print ISSN: 0893-9454
• Electronic ISSN: 1465-7368
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 32
• Issue: 2
• Pages: 496–523
• DOI: https://doi.org/10.1093/rfs/hhy090
• Keywords: payday loan, sub-prime credit, consumer credit, financial distress
• Public URL: https://nottingham-repository.worktribe.com/output/943971
• Publisher URL: https://academic.oup.com/rfs/article/32/2/496/5071904
• Contract Date: Jul 11, 2018