The Real Costs of Credit Access: Evidence from the Payday Lending Market

Probability of Economic Hardship among Low-Income Households

Key Findings:

    • Low-income households with proximate access to payday loans are 5.3 percentage points more likely to experience economic hardship, where hardship is defined as being unable to pay mortgage, rent or utilities bills, delaying needed medical or dental care, or cutting meals due to lack of money. 
    • Prior to the emergence and growth of payday lending, low-income households in these areas show small and statistically insignificant differences in economic hardship. 


Using geographic differences in the availability of payday loans, I estimate the real effects of credit access among low-income households. Payday loans are small, high interest rate loans that constitute the marginal source of credit for many high risk borrowers. I find no evidence that payday loans alleviate economic hardship. To the contrary, loan access leads to increased difficulty paying mortgage, rent and utilities bills. The empirical design isolates variation in loan access that is uninfluenced by lenders’ location decisions and state regulatory decisions, two factors that might otherwise correlate with economic hardship measures. Further analysis of differences in loan availability – over time and across income groups – rules out a number of alternative explanations for the estimated effects. Counter to the view that improving credit access facilitates important expenditures, the empirical results suggest that for some low-income households the debt service burden imposed by borrowing inhibits their ability to pay important bills.


Melzer, Brian T., The Real Costs of Credit Access: Evidence from the Payday Lending Market, Quarterly Journal of Economics, 126 (1), February 2011, 517–555.

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