| High-cost consumer loans, such as payday loans and rent-to-own leases, account for a growing portion of outstanding consumer loans in the United States. These types of loans merit closer examination, specifically with regard to whether and how much their costs harm the consumers that use them. Recent research on this topic varies and there is no consensus as to whether high-cost loans produce financial hardship. The 2011 FDIC National Survey of Unbanked and Underbanked Households provides data for an analysis of households' use of four types of high-cost loans and whether such behaviors are associated with indicators of household financial hardship. A linear probability model that utilizes an instrumental variable for high-cost loan use reveals that this relationship is positive, large in magnitude, and highly statistically significant. Specifically, households that use high-cost loans are roughly 15 to 20 percentage points more likely than non-users to experience financial hardship. Moreover, because an instrumental variable for high-cost loan use is used in this analysis and this variable temporally precedes financial hardship, this relationship appears to be causal. The direct implications of these conclusions apply to households and their financial behaviors. However, policymakers should take into account that high-cost loans cause consumer harm and craft financial regulatory policy accordingly. Future research should focus on which forms of government intervention would most effectively dissuade consumers from using high-cost loans. |
