Payday Borrowing: Credit and Networks among the Economic Insecure
This dissertation examines the financial position of payday borrowers using the most detailed nationally representative survey of American finances - the Survey of Consumer Finances. Payday loans are short term, unsecured loans generally less than five hundred dollars. Borrowers pay dearly for such loans, as fees are typically $15 for every $100 borrowed. Because the term for these loans is never more than two weeks, the annualized percentage rate is quite large ~ 390%. For the first time, in 2007 the Survey of Consumer Finances included a question about use of payday loans, and so it is now possible to expand the analysis of payday borrowing beyond basic demographic information and income.
Given these high costs, why would households choose this option for dealing with financial emergencies? I show that payday borrowing is driven more by a lack of resources, in particular available credit alternatives, rather than low incomes. In addition, budgeting is a significant factor. Another alternative that households often look to is financial support from friends and family. Access to financial support is driven by many of the same factors that make these households insecure. Nevertheless, I show "private safety nets" do indeed reduce payday borrowing. But network relations don't just entail receiving. The provision of financial support is correlated with overspending and increases the odds of payday borrowing.
This dissertation makes several contributions to our understanding of payday borrowing. First, using the detailed data on savings and budgeting practices, it shows the importance of building resources to managing budgetary shortfalls. Second and relatedly, I show that borrowers have little financial alternatives - they are effectively shut out of credit markets, and at the same time their network relationships can be both a help and a hindrance for avoiding payday loans.