SUMMARY



Summary for Responsible Lending



Summary

This thesis perform a randomized field trial to evaluate whether and how various ways to present information about the costs of payday loans impact individuals' decisions to continue borrowing from payday lenders. We design three information treatments that incorporate important behavioral principles from the psychology and economics literatures about the possible cognitive lapses payday borrowers might be making, and ways to de-bias for those lapses. The first (APR information) treatment strengthens the already existing mandate on APR disclosure on payday loan transactions by directly comparing the APR on a payday loan with the APR on others financial instruments that consumers are familiar with—car loan, credit card, and subprime mortgage APRs.

A payday loan is a small cash loan, usually between £100 and £1000, that is extended to a customer over a short time period, typically one to two weeks. The term payday loan suggests that the borrower will be able to repay the loan upon receiving his or her next paycheck.

Payday loans are short-term advances against a future paycheck.

A quick overview of the payday loan process is useful as a precursor to our intervention. When a customer enters a payday loan store desiring to take out, on average, a £350 loan until her next payday, she sees a price schedule of services posted on the wall. The schedule displays the cost of a payday loan as a fee (usually £10 to ££12) per £100 borrowed. This fee does not vary by the length of the loan or borrower risk. The loan duration is set by the individual's pay cycle; loans are always due on the next payday.

The loan process begins when the customer approaches a counter or window where a customer service representative (CSR) works and requests a new loan or a refinancing of an existing loan. ...