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Research Comment On: "Payday Loan Rollovers and Consumer Welfare"

March 9, 2015
Research

In "Payday Loan Rollovers and Consumer Welfare," Jennifer Lewis Priestley analyzes proprietary payday loan data for borrowers who received payday loans from 2006-2009 in California, Florida, Kansas, Missouri, Oklahoma, Texas and Utah to estimate the impact of payday rollovers on consumer welfare (as measured by changes in Vantages Score). The author finds that payday borrowers who engage in protracted refinancing or "rollovers" have positive changes to their credit scores, relative to borrowers with shorter periods of payday borrowing. In addition, the author finds that borrowers in states with less restrictive payday loan laws have better credit score outcomes.

Even if methodology weren't limited in the ways outlined above, the magnitude of the impact of rollovers on credit score is miniscule. For every additional rollover, an average borrower achieves an increase of 0.1-0.2 in their scores. Put another way, for every 10 rollovers (at an estimated cost of $450), the average borrower would achieve an increase of 1-2 points in their VantageScore. Given that the average credit score for borrowers in the sample ranged from 579-588, the typical payday borrower would need an increase of 13-22 points just to move from the highest risk "F" category to the next highest risk "Non-Prime" category. Therefore, any claim that sustained use of payday loans has a positive impact on consumer's welfare is hard to support by any reasonable cost-benefit analysis.