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Time to Repay or Time to Delay? The Effect of Having More Time before a Payday Loan Is Due

Author

Listed:
  • Susan Payne Carter
  • Kuan Liu
  • Paige Marta Skiba
  • Justin Sydnor

Abstract

We examine the effect of state laws on minimum payday loan durations that give some borrowers an additional pay cycle to repay their initial loan with no other changes to contract terms. Neoclassical models predict this "grace period" would reduce borrowers' need for costly loan rollovers. However, in reality, borrowers' repayment behavior with grace periods is very similar to borrowers with shorter loans, merely pushed out a few weeks. Potential explanations include heuristic repayment decisions and naive present focus. A calibrated model suggests that present-focused borrowers get less than one-half of the benefit from a grace period that time-consistent borrowers would.

Suggested Citation

  • Susan Payne Carter & Kuan Liu & Paige Marta Skiba & Justin Sydnor, 2022. "Time to Repay or Time to Delay? The Effect of Having More Time before a Payday Loan Is Due," American Economic Journal: Applied Economics, American Economic Association, vol. 14(4), pages 91-126, October.
    • Handle: RePEc:aea:aejapp:v:14:y:2022:i:4:p:91-126
    DOI: 10.1257/app.20180721
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    Cited by:

    1. Victor Medina-Olivares & Raffaella Calabrese, 2023. "Detecting Consumers' Financial Vulnerability using Open Banking Data: Evidence from UK Payday Loans," Papers 2306.01749, arXiv.org.

    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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