Payday Loan Rollovers and Consumer Welfare

Using payday-lender administrative data matched to borrower credit attributes from a national credit bureau, I find that borrowers who engage in protracted refinancing (“rollover”) activity have better financial outcomes (measured by changes in credit scores) than consumers whose borrowing is limited to shorter periods. These results are robust to an alternative definition of a “rollover” that ignores out-of-debt periods of 14 days between successive loans. Also, exploiting interstate differences in rollover regulation, I find that, while regulation has a small effect on longer-term usage patterns, consumers whose borrowing is less restricted by regulation fare better than consumers in the most restrictive states, controlling for initial financial condition. These findings directly contradict key assumptions about this market, raise significant policy questions for federal regulators, and suggest the appropriateness of further study of actual consumer outcomes before the imposition of new regulatory rollover restrictions