NILA members do not make payday loans, offering instead, traditional installment loans which are generally considered a safe and affordable alternative to payday or title products. Despite this critical difference, legislative and regulatory efforts to crack down on payday-style loans (often justified by citing the fact that balloon payments force repeated refinancing of loans, creating a ‘cycle-of-debt”) have regularly and inadvertently affected the provision of traditional installment loans too.
For that reason it is useful for us to examine the effects of payday loan bans on consumer borrowing. A highly regarded study on this topic, Consumer Borrowing after Payday Loan Bans, appeared in the Journal of Law and Economics, vol. 59 (February 2016), published by the University of Chicago. The study’s authors, Neil Bhutta, from the Federal Reserve Board, Jacob Goldin from Stanford Law School, and Tatiana Homonoff from Cornell University, sought to understand how borrower behavior changed after payday loan bans. Their conclusions were extremely interesting.
The study draws on both administrative and survey data to look at variation in payday-lending laws and the effects of restrictions. In short, the study finds that although these policies are effective at reducing payday lending itself, consumers simply respond by shifting to other forms of high-interest credit (for example, pawnshops or rent-to-own loans). This shifting was present, though less pronounced, for even the lowest-income payday loan users. This suggests that policies that target payday lending in isolation may be ineffective at reducing consumers’ reliance on high-interest credit.
These findings illustrate a point that NILA has made repeatedly in the past; that restricting access to credit has no effect on demand, and that safe, affordable alternatives must be available to meet demand, if laws aimed at banning products deemed to be unsafe are to avoid harming the people they are intended to protect.
Traditional installment loans can be, and increasingly are, that safe and affordable alternative. With rigorous underwriting and regularly scheduled, equal payments of principal and interest, traditional installment loans are structured to avoid the “cycle-of-debt” associated with balloon payment products. They can form part of a policy solution for lawmakers who want to remove problematic credit products from the marketplace, while keeping broad access to credit-building loans that drive financial inclusion.
To full study is available here: Consumer Borrowing after Payday Loan Bans, Journal of Law and Economics, vol. 59 (February 2016).