Researchers from George Mason University and Colby College Release New Study on Payday...

Researchers from George Mason University and Colby College Release New Study
on Payday Lending
Laboratory techniques used to examine the effects of short-term credit
products

FAIRFAX, Va., Feb. 6 /PRNewswire-USNewswire/ -- A team of researchers from
George Mason University and Colby College have found that allowing individuals
access to payday loans improves the borrowers' ability to survive financially.
Because payday loans can help the participants to manage their personal
finances better, the availability of payday loans -- despite their high
cost -- improves consumer welfare in the study by allowing borrowers to deal
with unexpected expenses. However, borrowers whose demand for payday loans
exceeds a certain threshold level are at a greater risk than those who do not
have access to payday loans.
Payday loans are short-term loans of $100 to $500 that typically must be
paid back within two weeks or by the borrower's next payday. The fees for
these loans vary from $10 to $25 per $100 borrowed, which often represents an
annual percentage rate of 391% or more.
The study was conducted by Prof. Bart J. Wilson of the Interdisciplinary
Center for Economic Science at George Mason University, Profs. David W.
Findlay and James W. Meehan, Jr. of the Department of Economics of Colby
College, and Dr. Charissa P. Wellford, an independent economist. Karl
Schurter, an under-graduate at the University of Virginia, is also a co-author
of the study.
Using techniques of experimental economics, the investigators created a
laboratory environment similar to that faced by financially strapped
consumers. They then conducted a controlled experiment using 318 subjects to
examine the effect, if any, that availability of payday loans has on
individuals' abilities to manage and to survive financial setbacks. The
principal objective of the study was to examine whether access to payday loans
improves, worsens, or has no impact on the likelihood of becoming insolvent.
According to Prof. Wilson, access to payday loans in their environment,
all else fixed, increases a borrower's probability of financial survival by
31%. Many participants effectively use payday loans as the means to absorb
shocks when, for example, they do not sufficiently save for unexpected "rainy
days."
The study, however, also found that the benefits from payday loans to
borrowers decline if the loans are overused; taking out an excessive number of
loans puts borrowers at greater risk than subjects to whom loans are
unavailable.
The study sheds additional light on questions not easily answered with
traditional empirical analysis, in part because disaggregated data do not
exist, and in part because the behavior of payday loan customers is not
readily observable at the time they make their borrowing decisions. The use of
a laboratory environment allows the investigators to observe how payday loan
customers' behavior responds to changes in the environment and the rules under
which they make their short-term loan choices. An additional benefit of the
laboratory study is that the economic decision environment is held constant so
that all participants face the same financially challenging conditions.
Several states, including Virginia, are considering placing additional
limits on loans, or banning them altogether, during their current legislative
session.
The complete discussion draft from the study is available online at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1083796.
SOURCE George Mason University

Prof. Bart J. Wilson of George Mason University, +1-703-993-4845