The Impact of Payday Lending Access on Household Consumption Patterns

• In Event: Financial Fragility and the Price of Credit: Payday Lending, Safety Nets, and Mortgage Costs

Abstract

This study examines the consumption effects of Ohio's Fairness in Lending Act of 2018, a landmark payday-lending reform that capped interest rates and restructured loan terms. Using a difference-in-differences design—comparing low-income households in border and non-border counties of West Virginia and Pennsylvania—we find that the reform substantially reduced household spending. Affected households experienced a 26 percent decline in total consumption, as lender exit and tighter credit access outweighed the price benefit of lower borrowing costs. This reduction was concentrated in essential expenditures: food spending fell 25 percent, while alcohol spending was unchanged. The findings underscore the importance of accounting for supply-side responses in consumer credit regulation, which can impose significant welfare costs on the most vulnerable households.

Background
High borrowing costs associated with payday lending have prompted bans and regulatory reforms across states, yet the welfare implications of restricting credit access remain inconclusive. Prior studies neglect two competing mechanisms: a price effect, whereby rate caps reduce borrowing costs and increase consumption, and a quantity effect, whereby stringent restrictions reduce lender profitability, induce exit, and curtail credit supply. This paper examines Ohio's Fairness in Lending Act of 2018 (HB 123), which took effect in October 2018 and imposed caps on loan amounts, interest rates, and fees in a previously unregulated market.

Methods
We use monthly household-level purchase data from the NielsenIQ Consumer Panel (2016–2019), aggregated at the UPC level. To address endogeneity, the sample is restricted to households in West Virginia and Pennsylvania—states that ban payday lending and border Ohio—excluding counties adjacent to other payday-permissive states. The analytic sample comprises 412 employed households at or below the federal poverty line (4,882 household-month observations). Outcomes include total spending and category-level expenditures on food, medications, and addictive products, with controls for household and economic characteristics. We estimate the intent-to-treat (ITT) effect of payday lending access via a difference-in-differences framework.

Main Findings
Two findings emerge. First, the quantity effect of restricted credit access overshadowed the price benefit of lower borrowing costs: affected households experienced a 26 percent decline in total monthly spending, concentrated among those at or below the federal poverty line and diminishing at higher income levels. Second, the spending decline was driven by reductions in essential rather than discretionary consumption—food spending fell 25 percent while alcohol expenditure was unchanged. Tobacco showed mixed results: aggregate spending declined, but regular users maintained or increased consumption.

Implications
Ohio's reform lowered borrowing costs but triggered lender exit, producing credit shortages that fell disproportionately on low-income households. The experience underscores a systematic underestimation of supply-side responses in credit regulation: reduced access, not reduced cost, drove the welfare loss. Effective policy must therefore pair rate restrictions with accessible alternatives—such as emergency assistance programs and small-dollar loan products—to protect credit-dependent populations.

Author

• Yiling Zhang, University of Alabama
  Presenting Author