| Abstract: |
Recent research on the effects of credit access among low- and moderate-income
households finds that high-cost payday loans exacerbate, rather than
alleviate, financial distress for a subset of borrowers (Melzer 2011; Skiba
and Tobacman 2011). In this study I find that others, outside the borrowing
household, bear a portion of these costs too: households with payday loan
access are 20% more likely to use food assistance benefits and 10% less likely
to make child support payments required of non-resident parents. These
findings suggest that as borrowers accommodate interest and principal payments
on payday loan debt, they prioritize loan payments over other liabilities like
child support payments and they turn to transfer programs like food stamps to
supplement the household’s resources. To establish this finding, the analysis
uses a measure of payday loan access that is robust to the concern that lender
location decisions and state policies governing payday lending are endogenous
relative to household financial condition. The analysis also confirms that the
effect is absent in the mid-1990s, prior to the spread of payday lending, and
that the effect grows over time, in parallel with the growth of payday lending. |