Short-term Liquidity

Cost of Living

What's in Savings?

What's in Savings?

What's in Savings?

More on Savings

Financial Shock

Financial Shock: Frequency

Financial Shock: Cost

Financial Shock: Ability to Cope

Payday Loans

Facts and Figures

• More payday offices than McDonald's (as of 2014)
• Number of payday loan borrowers each year: 12 million
• Average income for payday loan borrower: $30,000 annually
• 7 in 10 borrowers use them for regular, recurring expenses such as rent and utilities.
• Payday lenders have direct access to a borrower's checking account on payday
• Payday loans are available in 36 states, with annual percentage rates averaging 391 percent.

Facts and Figures

• In debt for five months of the year
• Pays an average of $\$$520 in fees to repeatedly borrow $\$$375
• Requires a lump-sum repayment of $430 on the next payday (36% gross paycheck)
  • Most borrowers can afford no more than 5 percent while still covering basic expenses.

Renewals...Scary

Repay, Renew, or Default

Are payday loans "heroes" or "villains"?

Theory

• Heroes:credit access boosts household utility by allowing users to smooth consumption over shocks (Friedman 1956)
• Villains: worsens well-being for households with unusually strong preferences for current consumption (Laibson 1997) and overoptimism/inattention about future prospects (Mann 2013).
• Debt-trap: repeated borrowing at high rates exacerbates financial distress.

Answer...Both

Evidence for Hero (no effect)

• Payday loans mitigate financial distress, i.e., smooth negative shocks (Morse, 2011; Dobridge 2016; Wilson et al. 2010; Zinman 2010; Morgan, Strain, and Seblani 2012)
• No effect on credit scores, delinquencies, likelihood of overdrawing.(Bhutta 2014; Bhutta, Skiba and Tobacman 2015; and Desai and Elliehausen, 2016; Hynes 2012)
• Racial composition does not effect store location (Bhutta 2014)

Evidence for Villain

• In an average period access to payday credit reduces well-being (Dobridge 2016)
• Banning payday loans reduces liquor sales (Cuffe and Gibbs 2015)
• Racial composition influences store location (Barth, Hilliard, and Jahera 2015; Barth, Hilliard, Jahera, and Sun 2016)
• Increase in bankruptcy and financial distress (Skiba and Tobacman 2011; Morgan, Strain, and Seblani 2012;Melzer 2011; Campbell, Tufano, and Martinez-Jerez 2012)
• Decline in job performance and retention, stronger in inexperience and unsophisticated (Carrell and Zinman 2016)

Solutions

• Regulation
• Innovation
• Financial Literacy

Regulation

• Require longer repayment periods
• See Colorado regulation
• Increased disclosure

Innovation

• New company like Earnin app
• How viable is "tipping" model?
• Can technology reduce origination fee?

Financial Literacy

Stats on Literacy

2015 NFC Study

• National: Q1:75% Q2:59% Q3:46% (N=27564)
• California:Q1:70% Q2:53% Q3:42% (N=1000)
• 3.16/6 Mean number of correct quiz answers
• 76% of assess own financial knowledge as high (5-7 on 7 point scale)

Literacy by Age Group

Literacy by Sex

Literacy by Education

Does Literacy help?

• Retirement planning
• More sophisticated investment behavior
• Making good borrowing decisions

Issues with Teaching Literacy

• Mixed results on long-term efficacy of teaching financial literacy
• Unclear the best "way" to teach literacy
• Debate on measuring outcomes and rigor of studies
• More research to be done here