Repeat Borrowing of Payday Loans: Risk and Protective Factors

Background

Payday loans are advertised as short-term loans designed to be used for short-term needs and emergencies. However, approximately 80% of cash-strapped and asset-poor payday loan borrowers are entrapped in a revolving door of payday loan borrowing. Some of the prolonged detrimental effects of payday loan borrowing are bankruptcies (Skiba & Tobacman, 2015), involuntary bank account closures (Campbell, Martínez -Jerez, & Tufano, 2012), medical debt (Lim et al., 2014), and poor health (Sweet, Nandi, Adam, & McDade, 2013). To this date, no existing study has determined the predictors of repeat payday loan borrowing. Thus, an exploration of factors associated with repeat payday loan borrowing is warranted.

Methods

Bankruptcy data afford researchers the opportunity to observe repeat payday loan borrowing (Martin & Longa, 2012). Data for 457 cases were collected from Chapter 7 personal bankruptcy files maintained on the Public Access to Court Electronic Records database of the U.S. Bankruptcy Court of a Southern district. Spanning from 2006 through 2011, the month of June was used as the time frame for data collection since June is not typically associated with major annual shocks to income, such as those during the tax season or gift-giving holidays (Martin & Longa, 2012). Individual and household characteristics, including employment status and economic well-being variables were collected.

The dependent variable was repeat borrowing of payday loans, which was operationalized as a dichotomous variable (1 = the filer borrowed payday loans twice or more; 0 = otherwise). As predictors of repeat borrowing of payday loans, the study used three sociodemographic and six economic characteristics. Multivariate logistic regression analysis was performed.

Results

Results revealed that repeat borrowing of payday loans was negatively associated with homeownership (p < 0.01) while positively associated with having medical debt (p < 0.05) and multiple children (p < 0.05). Specifically, the odds of repeatedly borrowing payday loans for homeowners was 0.36 times lower than for those who did not own a home. On the other hand, the odds of repeatedly borrowing payday loans were 2.12 times greater for those with medical debt and increased 1.34 times with each additional child. Repeat borrowing of payday loans was not statistically associated with other sociodemographic and economic variables such as having student-loan debt, having a child under age 6, receiving Social Security benefits, marital status, years of employment, and median income.

Implications

The findings suggest that policymakers should pay special attention to the needs of families with a large number of children, while cautiously promoting homeownership. To protect consumers from repeatedly borrowing payday loans, policymakers should address the underlying reasons for such borrowing behaviors such as absence of federal consumer protection laws regarding small loans, low asset and inability to repay mounting medical debt due to soaring health care costs, low income, and unstable employment. Social workers are well-positioned to work with policymakers and to help financially vulnerable families identify alternatives to payday loans. To better equip prospective social workers, policy practice and financial literacy should be infused into the social work curriculum.