Employing an unique information set comprising near all U.K. cash advance applications, along with customer credit files, we estimate the effect of cash advance use on customers during the margin of firm financing choices. We use an RD research design that exploits lender-specific credit history discontinuities.
We discover that pay day loan usage causes customers to try to get extra bank card and private loan credit within half a year after cash advance acceptance. This leads to successful loan applicants taking right out more non-payday loans and total non-payday credit increases, especially for signature loans. But pay day loans cause deterioration in customer creditworthiness. The probability of delinquency on non-payday financial obligation increases. After a tiny decrease that is one-month cash advance use persistently advances the chance that a customer will surpass the arranged overdraft limit; the percentage of non-payday loan balances in standard increases and customersвЂ™ credit bureau credit scores decrease. Estimated average therapy effects from OLS models show why these side effects of cash advance use decrease at greater credit rating thresholds but don’t look like heterogenous across customers by other traits, depending on credit history.
We thank John Campbell and Jonathan Zinman with regards to their good feedback and recommendations. We thank Will Dobbie, Don Morgan, Brian Melzer, Neale Mahoney, Jeremy Tobacman, Jialan Wang, and discussants Adair Morse and Justin Wolfers with regards to their thoughtful advice. Helen Gardner, Alessandro Nava, and Jasjit Sansoye offered research assistance that is excellent. We also thank colleagues in the Financial Conduct Authority therefore the University of Nottingham and seminar participants in the Bank of England, customer Financial Protection Bureau, Federal Reserve Bank of the latest York, NBER summertime Institute Law and Economics Meeting, NBER Summer Institute domestic Finance Meeting, Institute for Fiscal Studies, University of Cambridge, and University of Essex.Continue reading