Consumer Borrowing after Payday Loan Bans

Neil Bhutta, Jacob Goldin, and Tatiana Homonoff
The Journal of Law and Economics, 59(1): 225-259.

High-interest payday loans have proliferated in recent years; so too have efforts to regulate them. Yet how borrowers respond to such regulations remains largely unknown. Drawing on both administrative and survey data, we exploit variation in payday-lending laws to study the effect of payday loan restrictions on consumer borrowing. We find that although such policies are effective at reducing payday lending, consumers respond by shifting to other forms of high-interest credit (for example, pawnshop loans) rather than traditional credit instruments (for example, credit cards). Such shifting is present, but less pronounced, for the lowest-income payday loan users. Our results suggest that policies that target payday lending in isolation may be ineffective at reducing consumers’ reliance on high-interest credit.

Wagner Faculty