Evaluating the Interaction of Payday Loans and Formal Bank Credit

Abstract

A better understanding of the effects of payday credit and its regulation is needed before the federal government or additional states introduce regulatory restrictions on payday credit. This paper builds on a report by Kelly Edmiston to the Federal Reserve Bank of Kansas City and looks at state-to-state and year-to-year changes in use of payday credit to test the effects regulations have had on individual and state-level welfare. Using individual self-reported data from the Survey of Consumer Finances, I found that consumers of payday loans were less likely to repay formal bank credit on time. However, statewide FDIC bank statistics showed that the implementation of state law restricting or outlawing the use of payday loans resulted in lower statewide outstanding debt levels. These findings complicate the national dialogue about the role of ‘fringe’ financial services in the lives of the poor and their impact on the economy, and encourage more nuanced, less reactionary state regulation of payday loans.