Spillovers from Costly Credit

Abstract:

Recent studies of credit access among low-income households find that high-cost payday loans can exacerbate, rather than alleviate, financial distress. I find that households with payday loan access are also more likely to use food assistance benefits and less likely to make child support payments required of non-resident parents. I use an identification strategy built around cross-border access to loans, and supplemented with a variety of additional tests, to establish that payday lending plays a causal role in worsening financial distress. The findings suggest that borrowers in distress turn to transfer programs to supplement the household’s resources and prioritize payday loan payments over other liabilities like child support. In that way, payday lending produces negative externalities—costs imposed on taxpayers that fund transfer programs and non-resident family members that fail to receive child support.