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How Payday Credit Access Affects Overdrafts and Other Outcomes

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  • DONALD P. MORGAN
  • MICHAEL R. STRAIN
  • IHAB SEBLANI

Abstract

Despite a dozen studies, the welfare effects of payday credit are still debatable. We contribute new evidence to the debate by studying how payday credit access affects bank overdrafts (such as returned checks), bankruptcy, and household complaints against lenders and debt collectors. We find some evidence that Chapter 13 bankruptcy rates decrease after payday credit bans, but where we find that, we also find that complaints against lenders and debt collectors increase. The welfare implications of these offsetting movements are unclear. Our most robust finding is that returned check numbers and overdraft fee income at banks increase after payday credit bans. Bouncing a check may cost more than a payday loan, so this finding suggests that payday credit access helps households avoid costlier alternatives. While our findings obviously do not settle the welfare debate over payday lending, we hope they resolve it to some extent it by illuminating how households rearrange their financial affairs when payday loan supply changes.
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Suggested Citation

  • Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, March.
    • Handle: RePEc:mcb:jmoncb:v:44:y:2012:i::p:519-531
    DOI: j.1538-4616.2011.00499.x
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    References listed on IDEAS

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    1. H. Damar, 2009. "Why Do Payday Lenders Enter Local Markets? Evidence from Oregon," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(2), pages 173-191, March.
    2. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
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    5. Dennis Campbell & Asis Martinez-Jerez & Peter Tufano, 2008. "Bouncing outs out of the banking system: an empirical analysis on involuntary bank account closures," Proceedings 1106, Federal Reserve Bank of Chicago.
    6. Marianne Bertrand & Adair Morse, 2011. "Information Disclosure, Cognitive Biases, and Payday Borrowing," Journal of Finance, American Finance Association, vol. 66(6), pages 1865-1893, December.
    7. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports 309, Federal Reserve Bank of New York.
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