neil bhutta (federal reserve board) paige marta skiba ......teletrack score determines payday loan...
TRANSCRIPT
![Page 1: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/1.jpg)
Neil Bhutta (Federal Reserve Board) Paige Marta Skiba (Vanderbilt) Jeremy Tobacman (UPenn)
This research does not necessarily represent the views of the Federal Reserve
![Page 2: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/2.jpg)
Why do people use payday loans?
Do payday loans improve or worsen financial well-being?
![Page 3: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/3.jpg)
First-time payday loan applicants from one large payday lender
Applications span 2001-2004
Match applicants to their credit records
FRBNY/Equifax Consumer Credit Panel
Snapshot every quarter, 1999:1 – 2010:1
![Page 4: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/4.jpg)
Small, short-term loan (advance on paycheck)
$100-$1000 loan
1-4 week term
Typical cost: $15-$30 per $100 borrowed
▪ 390-780% APR for a 2 week loan
Volume: $30-50 billion/year
![Page 5: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/5.jpg)
Over-optimism or misunderstandings at play? People use payday loans despite having cheaper
alternatives (Agarwal et al 2009)
People underestimate debt service; think credit cards are more expensive (Bertrand and Morse 2011; Pew 2012)
Some research finds harmful effects of PDLs
(e.g. bankruptcy, loss of bank accounts) while other research finds benefits (e.g. mitigates foreclosures due to income shocks)
![Page 6: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/6.jpg)
Credit record information in quarter before first payday loan application
mean median N mean median N
Number of open accounts 3.8 3 38,220 5.0 4 103,766
Share of accounts not current 0.53 0.5 33,084 0.13 0 93,912
Has one or more credit cards 0.59 1 38,220 0.75 1 103,766
Total limit for cardholders ($) 3,050 1,154 22,556 18,914 11,000 78,146
Total balance for cardholders ($) 2,921 1,340 22,556 5,128 1,586 78,146
Number inquiries past 12 months 5.2 4 38,220 1.7 1 103,766
Num new acnts past 12 months 1.4 1 38,123 1.1 1 103,606
Equifax credit score 513 517 38,220 680 702 103,766
Total debt ($) 19,656 5,977 38,220 49,605 9,120 103,766
General populationPayday applicants
Desperation!(?)
Source: FRBNY/Equifax Consumer Credit Panel
![Page 7: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/7.jpg)
-20
0
0
20
040
060
0
-20 -10 0 10 20Quarters since first application
Mean available credit on credit cards ($)
34
56
-20 -10 0 10 20Quarters since first application
Mean number inquiries past 12 months
.44
.48
.52
.56
.6
-20 -10 0 10 20Quarters since first application
Mean share of accounts not current
45
050
055
060
065
0
-20 -10 0 10 20Quarters since first application
Credit score
Source: FRBNY/Equifax Consumer Credit Panel
![Page 8: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/8.jpg)
▪ Applicants in 2002:2 vs. random sample of consumers with the same scores at time of application
48
050
052
054
056
058
060
062
0
Equ
ifax r
isk s
core
2000 2002 2004 2006 2008Quarter
General population 2002q2 payday loan applicants
Source: FRBNY/Equifax Consumer Credit Panel
![Page 9: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/9.jpg)
0.2
.4.6
.81
-2 -1 0 1 2
Payday loan approval rate versus Teletrack score
▪ Teletrack score determines payday loan approval
▪ Compare applicants just above/below approval threshold
▪ Note: payday loans don’t directly affect credit scores
![Page 10: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/10.jpg)
475
495
515
535
555
-20 -10 0 10 20Quarters since first application
Over
Under
All applicants
475
495
515
535
555
-20 -10 0 10 20Quarters since first application
Within 1 SD of threshold
475
495
515
535
555
-20 -10 0 10 20Quarters since first application
Within 0.5 SD of threshold
475
495
515
535
555
-20 -10 0 10 20Quarters since first application
Within 0.25 SD of threshold
Source: FRBNY/Equifax Consumer Credit Panel
![Page 11: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/11.jpg)
The effect of getting a payday loan for those in the top/bottom quartile of the applicant credit score
distribution just before application
40
045
050
055
0
-20 -10 0 10 20Quarters since first application
Over
Under
Applicants w/ score at t-1 below 25th percentile
Mean credit score
52
555
057
560
0
-20 -10 0 10 20Quarters since first application
Applicants w/ score at t-1 above 75th percentile
Mean credit score
Source: FRBNY/Equifax Consumer Credit Panel
![Page 12: Neil Bhutta (Federal Reserve Board) Paige Marta Skiba ......Teletrack score determines payday loan approval Compare applicants just above/below approval threshold Note: payday loans](https://reader034.vdocument.in/reader034/viewer/2022051902/5ff202dd8e534604157ece06/html5/thumbnails/12.jpg)
Payday loans seem to be a last resort: ▪ Credit card lines are exhausted
▪ Intense search for cheaper credit is unsuccessful
Payday applicants have persistent financial problems Difficulties forming/committing to a budget
No evidence that getting a payday loan has a substantive effect (positive or negative) on financial well-being, as measured by credit scores