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posted on 28 May 2016

How Did The Great Recession Affect Payday Loans?

from the Chicago Fed

-- this post authored by Sumit Agarwal, Tal Gross, and Bhashkar Mazumder

The sharp decline in the U.S. economy that began in 2007, commonly referred to as the Great Recession, made it very difficult for many Americans to borrow. According to the Senior Loan Officer Survey conducted by the Board of Governors of the Federal Reserve System, banks across the country dramatically tightened credit card standards during the first two years of the Great Recession. From 2008 to 2010, the average number of credit cards per person fell from roughly 2.2 to 1.7, and the total limit on all credit card balances fell from around $25,000 to $21,000.

Given this sharp contraction in consumer credit, an obvious question is whether borrowers responded by shifting from conventional borrowing to more unconventional sources of credit. In particular, did Americans turn to payday lenders as an alternative? Payday lenders provide short-term, unsecured loans, typically of relatively small amounts of money at relatively high rates of interest. The typical payday loan is $300 for two weeks at an annualized interest rate of more than 350 percent. Payday lending is a controversial practice. Nearly all states regulate the industry, 13 states have made payday lending effectively illegal, and an additional five states have imposed severe restrictions on the interest that can be charged on payday loans.

In this article, we aim to answer two important questions: first, whether payday borrowing rose during the Great Recession; and second, whether the use of payday loans expanded beyond low-income borrowers to include more middle-income borrowers. In 2008, Senator Elizabeth Warren, at the time a law professor at Harvard University, argued that "as the economy has worsened ... payday loans have increasingly become crutches for those higher up the economic scale" (Christensen, 2008). Many articles in the popular press in recent years have voiced the same concern (for example, White, 2013; Popper and Thompson, 2011; and Marshall, 2015).

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