This week we have discussed some of the
interesting facts our recent research has uncovered about the title lending
industry and its borrowers. One of the goals of our research is to use economics
tools, from both neo-classical and behavioral economics, to develop a broader
understanding of how borrowers are making choices in this market.
Author: Paige Marta Skiba
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The Behavioral Economics of Title Lending
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Who Uses Title Loans?
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There isn’t a lot of information out there about who uses title loans. The two obvious sources for data on household credit choices leave us empty handed. The Federal Reserve’s Survey of Consumer Finances, began asking about payday loan use in 2007 but not title loans. The FDIC National Survey of Unbanked and Underbanked Households was a big step forward in getting academics access to national data on alternative credit choices, but does not address title loans. Because no national data exist on title borrowers, Kathryn Fritzdixon, Jim Hawkins and I surveyed customers in Texas, Idaho, and Georgia and we report the findings below.
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Title Lending’s Big Question: Dude, Where’s My Car?
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In a
new paper on title lending with Katie Fritzdixon and Jim Hawkins, we report data from a survey of over 400 title
lending customers across three states. To introduce this work, we wanted to
start off by talking about the important issues that title lending raises. The
biggest question, by far, is how many title borrowers end up losing their car?
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Pawnbroking: The Hot New (Ancient) Credit Market
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Thanks for having me back at Credit Slips! This week I’ll be blogging about two forms of credit that are increasingly popular: auto title lending and pawnshops.
Pawnbroking is back, and in a big way. Recent television shows like Pawn Stars and Hardcore Pawn are a testament to the resurging interest in this ancient form of lending. In a new paper with Susan Payne Carter and Marieke Bos, "The Pawn Industry and Its Customers: The United States and Europe,"we document important facts about the pawn business. Pawnbrokers take collateral or a “pledge,” (anything from jewelry to tools to dental implants!) in exchange for about 50 percent of the item’s resale value, plus interest.
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Asymmetric Paternalism
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With the growing evidence on behaviors that deviate from the rational-choice model, a discussion on paternalism is taking center stage. As an economist, I am pretty averse to taking choices away from people, but can we have our cake and eat it too? Enter “asymmetric paternalism.”
“A regulation is asymmetrically paternalistic if it creates large benefits for those who make errors, while imposing little or no harm on those who are fully rational…"
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Are Payday Loans as Profitable as We Think?
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No. These firms have ordinary profitability despite astonishing interest rates.
My recent study with Jeremy Tobacman finds payday lenders’ firm-level returns differ little from typical financial returns, notwithstanding their effective annualized interest rates of many thousand percent. Standard financial data (on stock returns and SEC filings) and loan-level data from a payday lender are consistent with an interpretation that payday lenders face high per-loan and per-store fixed costs in a competitive market.
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Why Do People Use Payday Loans?
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Economic models of borrowing and saving offer a hat trick of (not necessarily mutually exclusive) explanations for why people would borrow on high-interest credit like payday loans: 1) Consumers may heavily discount the future, 2) Consumers may experience shocks that cause large, unanticipated variation in their immediate consumptions needs (such as car repair or emergency room visits), and 3) Consumers may have overly rosy forecasts (of either the shocks they will face or their own self-control).
Jeremy Tobacman and I recently put these three theories to real-world data on payday loan borrower behavior and found that behavior is consistent with people being at least partially naïve about their own self-control.
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Do Payday Loans Cause Bankruptcy?
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Anecdotes about the effects of high-interest payday loans abound, but these correlations don’t tell us about the causal impact of borrowing at 450% APR. Simply observing payday loan borrowers’ in financial distress can’t determine which direction the causality goes.
Jeremy Tobacman and I have found a clever way to sort out this causality issue and can answer at least this question: "Do Payday Loans Cause Bankruptcy?" with a decisive "Yes."