We analyse the effects of extending credit to marginal borrowers in the context of the payday lending market. A unique transaction-level dataset is constructed comprising 99% of payday loans (and declined applications) issued in the UK over a two year period, matched to consumer credit files and a bespoke survey data. Using regression discontinuities at lender credit score thresholds we estimate the monthly time-varying causal effects of using a payday loan on an extensive range of outcomes including delinquency and credit usage; plus also survey measures, such as borrowing from family, consumption and subjective wellbeing. Our results show payday loans provide short-lived liquidity gains which benefit borrowers by raising consumption and lowering the immediate risk of non-payment on credit and debt in the first few weeks. However, in the following months payday loans cause consumers to persistently exceed bank overdraft limits, miss credit repayments, fall behind with bills and increase the share of debt in default. Results reveal no effects on subjective wellbeing, but do show high levels of regret among users of payday loans, the majority of whom repay more on their loan than they expected to. Our results are consistent with the view that in the medium term payday loans increase overall hardship for consumers.
Presented by:
Ben Guttman-Kenney (Financial Conduct Authority)
Date & time:
February 3, 2016 1:00 pm - February 3, 2016 2:00 pm
Venue:
2N2.4.16
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