Payday Loans Increase Likelihood of Future Bankruptcy
Payday loans are one of the most frequently used types of credit in the country, yet there has been relatively little academic research on the matter. A new study by scholars at Vanderbilt Law School and Oxford University confirms what many people have suspected - that these and similarly small, high-interest and short-term loans increase the likelihood of bankruptcy.
Payday lenders now have more storefronts in the United States than McDonalds and Starbucks combined.
Despite the extremely short time frame of these loans, the author find “the cumulative interest burden from payday and pawn loans amounts to roughly 11% of the total liquid debt interest burden at the time of bankruptcy.”
“Standard economic theory suggests that consumer credit, even high-interest credit can facilitate consumption-smoothing, and the payday loan industry asserts that the loans help customers cope with short-term shocks that arise between paychecks… Many policymakers and consumer advocates have a different view, deeming the loans predatory and usurious.”
Not surprisingly, use of these loans increases the likelihood of Chapter 13 bankruptcy filing by statistically significant margins: 2.48 percentage points over the two-year time frame, in comparison to those who were rejected for payday loans.
First-time loan approval precedes significant additional high interest rate borrowing; and the consequent interest burden tips households into bankruptcy.
*Do Payday Loans Cause Bankruptcy? by Paige Marta Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Oxford).
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