This seminar will be delivered by Stefan Hunt (Financial Conduct Authority).
It is based on paper 'How do payday loans affect UK consumers?' written by:
- John Gathergood (School of Economics, University of Nottingham)
- Ben Guttman - Kenney (Financial Conduct Authority, London)
- Stefan Hunt (Financial Conduct Authority, London)
Payday loans are one of the most controversial recent innovations in consumer finance. An extensive range of studies draw differing conclusions as to the effects of payday loan use, with the majority analysing bans or restrictions in US states. Using administrative data from the largest 37 lenders in the UK, we construct a dataset of nearly all loan applications over a two year period with individuals matched across firms. We match the loan records to six years of individual consumer credit histories and a bespoke consumer survey. Using lenders' credit scores for each application and knowledge of their cutoffs, we implement a regression discontinuity design exploiting credit score discontinuities. We assess the impact of payday loan use on consumer finances and wellbeing. Specifically, we estimate the monthly time-varying causal effects of using a payday loan on an extensive range of outcomes including credit outcomes, such as consumer credit applications, credit usage, repayment and delinquency, and survey measures, such as household financial hardship, informal borrowing, consumption and subjective wellbeing.
Our results show payday loans provide short-lived liquidity gains which benefit consumers, raising consumption and lowering the immediate risk of non-payment on credit and debt in the first few weeks. However, in the following months payday loans cause consumers to exceed bank overdraft limits, miss credit repayments, fall behind with bills and increase the proportion of their debt in delinquency. The results reveal no effects on subjective wellbeing, but do show high levels of regret among users of payday loans, the majority of whom repay more on their loan than they expected to. Our results are consistent with the view that in the medium term payday loans increase overall hardship for households. The UK parliament issued primary legislation in December 2013 mandating that the Financial Conduct Authority impose a price cap on payday loans. This research provided critical evidence for the setting of the structure and level of the cap.