Restricting Consumer Credit Access: Household Survey Evidence on Effects around the Oregon Rate Cap

This paper examines the short-run effects of restricting access to expensive credit. It uses household panel survey data on payday loan users collected around the imposition of binding restrictions on payday loan terms in Oregon. Several studies find that access to expensive credit exacerbates financial distress. These findings suggest that psychological biases lead consumers to do themselves more harm than good when handling expensive liquidity, and hence restricting access will help consumers by preventing over-borrowing. Still other studies suggest that access to expensive consumer loans helps borrowers smooth negative shocks, make productive investments in job retention or better manage liquidity to alleviate financial distress. These findings suggest that restricting access will harm borrowers by preventing them from financing valuable investment and consumption smoothing opportunities. The paper states that restricting access harmed Oregon respondents over the short term. Findings indicate that:

• Restrictions on expensive credit dramatically reduced access to payday loans in Oregon;
• Former payday borrowers responded by shifting to incomplete, inferior and costly substitutes.