RESEARCH ON FINANCIAL BEHAVIORS AND USE OF

SMALL-DOLLAR LOANS AND FINANCIAL SERVICES

LITERATURE REVIEW
Prepared for the US Department of the Treasury by the Urban Institute, 2010

Authors of this report are:

Brett Theodos, The Urban Institute

Jessica F. Compton, The Urban Institute

Abstract

This literature review provides an overview of research on the following small-dollar credit products:

auto title loans, pawnshops, payday lending, refund anticipation loans (RALs) and checks (RACs), and

rent-to-own (RTO). This review includes recently published research. It is not intended as an exhaustive

treatment of these topics, but is designed to highlight key findings relevant for additional research.

Acknowledgments

This report was completed under contract to the U.S. Department of the Treasury under Order Number

GS23F8198H/T09BPA017, with funds authorized by the U.S. Department of the Treasury.

Oversight and review were provided by the U.S. Department of the Treasury’s Office of Financial

Education and Financial Access. The report benefited from the experience and advice provided by

Signe-Mary McKernan and Nancy Pindus.

The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that

examines the social, economic, and governance problems facing the nation. The views expressed are

those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
1

Small-Dollar Loan Products and Financial Services Definitions

Auto Title Loan

Auto title loans are small short-term loans secured by a borrower’s vehicle. The loan amount is usually

based on the car’s worth. Additional charges, such as processing fees, may apply and a lump sum

payment is usually due at the end of the loan term. The borrower generally keeps possession of the car

during the term of the loan but leaves the title with the lender as security for repayment of the loan.

The lender may require a copy of the keys to facilitate repossession in the event of default. If the

borrower is unable to repay the loan at maturity, the lender frequently renews the loan while

introducing additional charges. If the borrower continues to not pay, the lender may repossess the car.

Also, rather than making the full payment at the end of the loan term, borrowers may pay the accrued

interest and roll over the principal amount into a new loan which may also introduce additional fees to

the consumer. Title lenders may also refer to their loans as “sales and leasebacks,” “title pawns,” or

“motor vehicle equity lines of credit.”1Auto title loans have a typical term of one month and loan sizes

range between $600 and $2,500.2 One survey found that 7 percent of the U.S. population reported using

an auto title loan in the past five years (Applied Research and Consulting 2009).

Pawnshop Loan

The pawn process allows customers to pledge property as collateral and, in return, receive a small-dollar

loan. Pawn loans are made on everything from jewelry to electronics. If the pawn customer chooses to

redeem the loan, the collateral is returned upon repayment of the loan and the regulated fee. The

option to redeem the collateral remains with the customer until the expiration of the contract. If the

customer elects not to redeem his or her collateral by repaying the loan, there is no credit consequence

to the borrower and the items are sold by the pawnbroker to retail consumers. Pawn transactions are

the only type of consumer credit that requires reporting to local law enforcement agencies. In many

states this reporting is required daily and must include personal information about the consumer (i.e.,

ethnicity, gender, address). Much of this information qualifies as nonpublic personal information under

federal privacy law and is entitled to protection as such.3Additional reporting and research on

pawnbrokers has noted the increasing numbers of pawn sales through the Internet on sites such as eBay

(see Caskey 2005). The typical pawnshop loan lasts for one month and is worth less than $100.4

According to a report by Applied Research and Consulting (2009), 8 percent of people in the U.S. report

using a pawn loan in the past five years.

Payday Loan

A payday loan is a small unsecured, short-term loan that is usually repaid on the borrower’s next

payday. Customers are required to supply a few supporting documents, including proof of a regular

income, a personal checking account, and identification. When the customer is approved for the payday

loan, he or she writes a personal check for the amount of the advance plus a fee. The lender advances

1

Amanda Quester and Jean Ann Fox, 2005, Car Title Lending: Driving Borrowers to Financial Ruin, Washington DC:

The Center for Responsible Lending and The Consumer Federation of America.

2

South Carolina Appleseed Legal Justice Center, 2004, Auto Title Loans and the Law,Columbia: South Carolina

Appleseed Legal Justice Center.

3

National Pawnbrokers Association, http://www.nationalpawnbrokers.org.

4

National Pawnbrokers Association, 2008, Pawnbroking Industry Overview: Meeting the Needs of America’s

Working Families, Keller, TX: National Pawnbrokers Association.
2

the customer funds immediately but holds the check until an agreed -pon date, usually within two to

four weeks, when the borrower receives his or her next paycheck. Payday loans average $250–$350,

typically for two weeks. For a $100 loan, fees average $15—$20 (Flannery and Samolyk 2005). Using

data from a nationally representative survey, Applied Research and Consulting (2009) found that 5

percent of respondents reported using a payday loan in the past five years.

Refund Anticipation Loan (RAL) or Check (RAC)

A refund anticipation loan (RAL) is money borrowed by a taxpayer from a lender based on the taxpayer’s

anticipated income tax refund. RALs are interest-bearing loans that allow a taxpayer to receive his or her

refund from a lender before receiving it from the IRS. With refund anticipation checks (RACs), the bank

opens a temporary bank account into which the IRS directly deposits the refund check. The bank waits

until the IRS directly deposits the consumer’s refund into the account and then issues the consumer a

paper check and closes the account. The consumer picks up the check from the tax-preparer’s office.

A tax preparer arranging a RAL or RAC must secure the taxpayer’s written consent to disclose tax

information to the lending financial institution in connection with the application. Tax preparers can

deduct tax-preparation fees and additional RAL/RAC preparation fees from the customer, leaving the

final RAL/RAC to be borrowed. When assisting a taxpayer in applying for a RAL or RAC, the provider may

charge a flat fee for that assistance. The fee must be identical for all customers and must not relate to

the amount of the refund or the financial product. If a taxpayer is approved, then a RAL is directly

deposited within several business days to the taxpayer’s account. If a taxpayer is approved for a RAC,

then the taxpayer receives a check (either mailed or on the spot). If the RAL or RAC customer does not

receive the expected tax return amount as calculated by the tax preparer, he or she is liable to the

lender for additional interest and other fees, as applicable for receiving the RAL/RAC.5 Nationally, 8

percent of people report receiving a RAL in the past five years (Applied Research and Consulting 2009).

Rent-to-Own (RTO) Agreement

The rent-to-own (RTO) industry (also known as the rental-purchase industry) consists of retailers that

rent furniture, appliances, home electronics, and jewelry. RTO transactions provide immediate access to

such goods for a relatively low weekly (or biweekly) or monthly payment without credit checks or a

down payment. This self-renewing weekly or monthly lease for rented merchandise provides the

customer with the option to purchase the good by continued payments for a specified period of time,

usually 12 to 24 months, or by early payment of some specified proportion of the remaining lease

payments. The customer has no obligation to continue payment beyond the current weekly or monthly

period. A nationally representative survey found that 5 percent of respondents reported using an RTO

store in the past five years (Applied Research and Consulting 2009).

5

Internal Revenue Service, http://www.irs.gov, and Chi Chi Wu, 2004, “Building a Better Refund Anticipation

Check: Options for VITA Sites,” Boston: National Consumer Law Center.
Auto Title Loans 3

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Auto Title Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Applied Research and

Consulting LLC. 2009.

Financial Capability in

the United States: Initial

Report of Research

Findings from the 2009

National Survey. New

York: Applied Research

and Consulting LLC.

Individuallevel survey

data

1,488 U.S.

survey

respondents of

which 180 were

unbanked;

nationally

representative

Descriptive

analysis

Of all survey respondents, 7 percent reported use of an auto title loan in

the last five years. Seven percent of 18–29 year-olds took out an auto title

loan compared with 10 percent of 30–44 year-olds, 7 percent of 45–59

year-olds, and 4 percent of those ages 60 and over. Five percent of

respondents making less than $25,000 took out an auto title loan,

compared with 7 percent of those making between $25,000 to $75,000

and 10 percent of those making over $75,000. Five percent of those with

less than a high school education took out an auto title loan as compared

with 6 percent of those who graduated high school, 9 percent of those with

some college, and 7 percent of respondents who have more than an

undergraduate college degree.

Of respondents considered unbanked (those without any depository

account), 5 percent reported using an auto title loan while 7 percent of

those considered banked used an auto title loan. Of respondents who felt

they were not good at dealing with day-to-day financial matters, 7 percent

used an auto title loan in the past five years, the same percentage as those

who considered themselves good at dealing with day-to-day financial

matters.

 
Auto Title Loans 4

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Auto Title Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Feltner, T. 2007. Debt

Detour: The Automobile

Title Lending Industry in

Illinois. Chicago, IL:

Woodstock Institute and

the Public Action

Foundation.

Illinois court

cases

61 Illinois auto

title loan

borrowers who

were taken to

court in 2005 by

a licensed auto

title loan

company

Descriptive

analysis

Nearly all the loans referenced in the Illinois court cases had terms of more

than 60 days, allowing them to circumvent strong consumer protection

passed by the state in 2001. Of the loans reviewed, 93 percent were

structured so that the borrower made monthly, interest-only payments

and a final balloon payment of the entire loan principal. These loans may

contribute to a series of refinances or renewals commonly described by

consumer advocates as a cycle of debt. Of the loans reviewed, 23 percent

were used to repay a previous loan with the same lender.

Overall, auto title loans were more likely to be made to male borrowers

living in moderate- to middle-income communities and made against older,

high-mileage vehicles. The average borrower pursued in court by a title

lender faced median damages of $5,462 on a median loan of just $1,500—

nearly four times the original loan principal. Included in this amount is the

$268 in court and attorney fees. Borrowers often fail to appear in court,

resulting in a default judgment in favor of the lender; nearly half (48

percent) of reviewed cases were granted default judgments. Eighteen

percent of default auto title loans resulted in the repossession or loss of

the borrower’s vehicle.

  

Fox, J. A., and E. Guy.

2005. Driven into Debt:

CFA Car Title Loan Store

and Online Survey.

Washington, DC:

Consumer Federation of

America.

Individuallevel data of

store staff;

review of

online title

lenders; state

laws and court

decisions for

all 50 states

81 auto title

stores in 11

states

Descriptive

analysis

Over two dozen title lending bills were filed during the 2005 state

legislative season. To regulate the auto title lending industry, 13 states

have either enacted restrictive title loan laws or court decisions have

established that title loans are regulated under pawn loan laws. Another 31

states have small loan rate cap laws or usury limits that restrain car title

loan rates.

Fox and Guy find that title lenders use several loan structures that evade

state usury or small-loan rate caps. In some cases, lenders size their loans

to fall outside rate-cap limits. In South Carolina, auto title loans are called

601 loans because the threshold for small loan rate caps is $600. In other

states, auto title lenders repackage single-payment title loans as lines of

credit to get around rate caps. In Virginia, Iowa, and Kansas, auto title loan

companies define the industry as open-ended credit. This allows such

companies to benefit from the deregulation of credit cards within those

states. In other states, title lenders who make loans via the Internet export

high-cost loans to consumers in protected states by using laws from states

with no rate caps.

   
Auto Title Loans 5

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Auto Title Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Fox and Guy 2005

(cont’d)

Another method used by auto title lenders is called sale-leaseback. Under

sale-leaseback, the lender asserts that the borrower “sold” the car to the

lender who then “leases” it back at a rate not permitted for lenders.

Borrowers pay monthly fees to “lease” the item with the option to “buy”

back the property at the end of the transaction. If payment is not made,

the lender may repossess the property, sell it, and retain the proceeds. Fox

and Guy find that only four states specifically prohibit sale-leaseback

transactions.

Fox and Guy find that the median fee (which is in addition to the interest

rates for loans) for customers was $18. Including the initial loan fee and the

monthly finance charge, consumers would pay $63 to $181 for a $500 30-

day loan term. On average, lenders loan 55 percent of the value of the

vehicle. Auto title lenders charge a median 25 percent per month finance

charge, which translated to 300 percent annual interest. Online title

lenders quote average term rates of 24 percent to 652 percent annual

percentage rate (APR).

Over 20 percent of auto title company staff were unable to provide the

cost of borrowing. Staff from those companies surveyed often quoted

monthly finance charges as an interest rate instead of the federally

required APR. One-third of surveyed auto title lender staff quoted an

annual rate as the cost of loans, while more than 6 percent refused to

quote a cost rate.

The analysis also found that few lenders assessed the credit histories of the

borrowers. Only 7 percent used Teletrack, a specialized credit reporting

service, while another 7 percent performed full credit checks. Half of the

lenders provided no literature on their loan products at the retail site.

Twenty percent of stores posted rate information.

   
Auto Title Loans 6

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Auto Title Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Tennessee Department

of Financial Institutions.

2008. The 2008 Report

on the Title Pledge

Industry. Nashville, TN:

Tennessee Department

of Financial Institutions.

Administrative

-level data

672 auto title

locations

representing

175 licensed

auto title

companies

Descriptive

analysis

As of 2006, Tennessee auto title lenders are required (by the state) with

the third renewal of a title pledge agreement, to make a 5 percent principal

paydown reduction per month whether or not the payment is received. In

the event the consumer cannot make the scheduled principal reductions,

the lender may defer such payment until the end of the title pledge

agreement. The Tennessee Department of Financial Institutions found that

the application of a 5 percent principal reduction decreased the amount of

interest and fees paid over the life of a loan by $1,045, provided that both

agreements are fully satisfied at the end of the 22nd month.

Seventy percent of new title loans (those agreements that were not

rollovers) were for amounts under $1,000; 35 percent of all new loans

were valued between $251 and $500. When assessing the income and

expenses of the state’s auto title lenders, bad debt (customer debt not

offset by the sale of possessed vehicles) accounted for 16 percent of

industry expenses. Although the industry in Tennessee was profitable,

profitability was widely disparate among title providers in the state. Of 672

licensed locations, 152 reported less than $100,000 of net income or a loss.

  
Pawnshop Loans 7

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Pawnshop Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Applied Research and

Consulting LLC. 2009.

Financial Capability in

the United States: Initial

Report of Research

Findings from the 2009

National Survey. New

York: Applied Research

and Consulting LLC.

Individuallevel survey

data

1,488 U.S.

survey

respondents of

which 180 were

unbanked;

nationally

representative

Descriptive

analysis

Of all survey respondents, 8 percent reported use of a pawnshop in the last

five years. Nineteen percent of 18–29 year-olds pawned items compared

with 9 percent of 30–44 year-olds, 6 percent of 45–59 year-olds, and 1

percent of those ages 60 and over. Sixteen percent of respondents making

less than $25,000 used a pawnshop, compared with 7 percent of those

making between $25,000 to $75,000 and 1 percent of those making over

$75,000. Sixteen percent of those with less than a high school education

reported using a pawnshop in the last five years, as compared with 11

percent of those who graduated high school, 7 percent with some college,

and 3 percent of respondents who had more than an undergraduate college

degree.

Of respondents considered unbanked (those without any depository

account), 26 percent reported using a pawnshop in the last five years while

only 6 percent of those considered banked had used a pawnshop in the last

five years. Of respondents who felt they were not good at dealing with dayto-day financial matters (e.g., checking accounts, credit and debit cards), 14

percent had used a pawnshop in the past five years while only 7 percent of

those who considered themselves good at dealing with day-to-day financial

matters reported use.



Caskey, J. P. 2005.

“Fringe Banking and the

Rise of Payday Lending.”

In Credit Markets for the

Poor, edited by P. Bolton

and H. Rosenthal (17–

45). New York: Russell

Sage Foundation.

American

Business

Information;

InfoUSA

Pawnshops and

pawnshop

consumers

Descriptive

analysis

The number of pawnshops nationally grew at about 6 percent or more per

year through 1996. However, between 2000 and 2002, the number of

pawnshops in many states declined. By 2003, the number of pawnshops,

11,683 nationally, barely exceeded the number in 1997. According to

Caskey, the major reason pawn brokering lost its momentum was the rise of

payday lending. Most pawnshop customers have credit profiles that prevent

them from obtaining lower-cost credit from mainstream lenders. However,

Caskey notes that survey data (See John Caskey, 1997, “Lower-Income

Americans, Higher-Cost Financial Services,” Madison, WI: Filene Research

Institute) from lower-income households indicate that a majority of

pawnshop customers have bank accounts, and many might be eligible for

payday loans.

Caskey notes that those eligible for payday loans may find several benefits in

using them as compared with pawn loans. Unlike pawnshops, payday

lenders are willing to make large loans, on average $250 versus $75 for

pawnshops. Though payday loans carry interest rates similar to most pawn

loans, the customer leaves a check with the payday lender rather than a

 
Pawnshop Loans 8

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Pawnshop Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Caskey 2005 (cont’d)

personal possession. Caskey also speculates that consumers may simply

perceive payday lenders as more respectable than pawnshops.

By the late 1990s, possiblly due to consumers switching to payday loan

usage, pawnbrokers expanded their consumer base. Many pawnbrokers

began offering payday loans. Others began selling their goods using Internet

services (e.g., Ebay). Caskey concludes that the financial services regulatory

environment and trends in electronic payments, either possibly increasing

payday or other alternative financial product use, are likely to be the most

important factors over the next several years shaping pawnbrokering.

 
Pawnshop Loans 9

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Pawnshop Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

FDIC

Unbanked/Underbanked

Survey Study Group.

2009. FDIC National

Survey of Unbanked and

Underbanked

Households.

Washington, DC: Federal

Deposit Insurance

Corporation.

Unbanked/

Underbanked

Supplement to

the Current

Population

Survey

47,000 U.S.

households

surveyed in

2009; nationally

representative

Descriptive

analysis

Roughly one out of six unbanked households, those currently without a

checking or savings account, have obtained funds by selling items at

pawnshops in the last five years. Previously banked households were more

likely to have sold items at a pawnshop than never-banked households.

About one-fifth of previously banked households (21 percent) have sold

items at pawnshops compared with 8 percent of never-banked households.

In contrast to other alternative financial service (AFS) products, pawnshops

tend to be used much less frequently. About 20 percent of unbanked

households that sold items at pawnshops did so more than once or twice a

year, and nearly half of unbanked households that have sold items at

pawnshops almost never did so.

Approximately 16 percent of underbanked households, those that have a

bank account but rely on alternative financial products, reported using

pawnshops within the last five years. Compared with other underbanked

households that use alternative financial products, underbanked households

that pawned did so infrequently. Only 13 percent of underbanked

households that use pawnshops do so at least a few times a year. This is just

over one-third of the number of underbanked households who reported use

of a payday loan a few times a year in the last five years. Thirty-three

percent of underbanked households who pawned did so once or twice a

year. Over half (55 percent) of pawnshop users pawned almost never.

Of underbanked households that used pawnshops in the last five years, 38

percent did so because they felt it was easier than qualifying for a bank loan.

Thirteen percent of underbanked households turned to pawnbrokers

because they could not qualify for a bank loans. Just over 20 percent of

underbanked pawn users felt that pawnshops are more convenient than

banks. Nearly 20 percent of underbanked households had other reasons for

using pawnshops.


Pawnshop Loans 10

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Pawnshop Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Fellowes, M., and M.

Mabanta. 2008. Banking

on Wealth:

America’s New Retail

Banking Infrastructure

and Its Wealth-Building

Potential. Washington,

DC: Brookings

Institution.

FDIC

Institution

Directory;

infoUSA;

store-level

data from

state and

federal

licensing

agency

Census tract

locations of

banks, credit

unions, payday

loan providers,

pawnshops, and

check cashers in

2007

Descriptive

analysis;

simulation

models

There are more than 10,300 pawnshops in business. Of these locations,

more than 46 percent are in low-income neighborhoods and another 30

percent are in lower-middle-income neighborhoods. The authors suggest

that this finding may be an indication of pawnshops' mostly moderate- and

lower-income customer base. Fellowes and Mabanta also find that about 93

percent of pawnshops are located within one mile of a bank or credit union

branch, and 80 percent are located in the same neighborhood as a bank or

credit union branch. This trend is only modestly different across

neighborhood income groups, indicating that pawnshops are as likely to be

close to branches in low-income neighborhoods as they are in higher-income

neighborhoods.



Johnson, R. W., and D. P.

Johnson. 1998.

Pawnbroking in the U.S.:

A Profile of Customers.

Washington, DC:

Georgetown University,

Credit Research Center.

Individuallevel survey

data

1,820

pawnshop

customers who

have borrowed

within the last

12 months or

who are aware

of and shop at

pawnshops but

do not borrow

money there, at

9 different

pawnshops in 6

selected states

Descriptive

analysis

Johnson and Johnson believe that pawnshop customers comprise an

especially vulnerable population and lack sufficient alternatives for shortterm loans. As reported from consumer surveys, the main reason individuals

borrow from pawnshops instead of banks is that they have a much better

chance of getting the loan they need. Correspondingly, Johnson and Johnson

find that a high percentage of pawn borrowers who have applied for credit

elsewhere have been rejected and express a desire to avoid the credit check

that is part of most lending procedures. In addition, or perhaps as a result,

many are uncomfortable with aspects of established financial institutions.

Over 50 percent of survey respondents learned about the pawnshop from

the shop sign.

The most frequent pattern of pawnshop customer usage is borrowing for a

few weeks or a month, redeeming the pawns then later, borrowing again

and redeeming again. Household possessions are used in lieu of savings

accounts and in lieu of credit checks. However, pawnshops meet only the

needs for short-term blips in the household’s finances. Consumers also

reported that their most common alternative to pawning is to seek funds

from friends or relatives.

Their survey found that pawnshop customers tend to have larger

households; are more likely to have had a divorce, separation, or

widowhood or to have never been married; and have less education than

their cohorts. The survey also found that the majority of pawnshop

customers are ages 25–44. Johnson and Johnson note that this age range

represents the family-raising stage of life when the demands upon a

household are frequently greater than the income.

   
Pawnshop Loans 11

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Pawnshop Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Johnson and Johnson

1998 (cont’d)

Also, Johnson and Johnson find that most pawnshop customers are men.

Pawnshop employees suggested that even fewer women would have been

active pawners if not for two factors: (1) a primary pawned item is jewelry,

and (2) men are sometimes hesitant to admit that the household needs

quick cash.

   
Payday Loans 12

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Agarwal, S., P. M. Skiba,

and J. Tobacman. 2009.

“Rationality in the

Consumer Credit

Market: Payday Loans

and Credit Cards—New

Liquidity and Credit

Scoring Puzzles?”

American Economic

Review: Papers &

Proceedings 99(2): 412–

17.

Individual-level

credit card

account data

from a large

U.S. bank and a

payday loan

provider

102,779

payday loan

borrowers and

143,228 credit

card account

holders within

the states

where the

payday lender

operates;

matched

sample of

3,090 people

Logit

regression

DV

(dependent

variable):

Credit card

default

To address the question of why people borrow the authors look at

individuals' liquidity over time. They find that credit card liquidity falls by

$545 over the previous year on average, an amount that is much larger than

the average $300 of a first-time payday borrower’s loan. Additionally, the

majority of liquidity deterioration happens in the five months before the

payday loan is taken. These findings are contrary to the scenario in which an

individual has an unexpected shock and may quickly need a small-dollar

loan; in this case, one would expect to find a large plunge in liquidity near

the time of payday loan use. The authors suggest impatience, general

financial management, or persistent shocks as explanations for their finding

average liquidity falling steadily.

When analyzing the quality of information used by lenders, the authors find

a substantial difference between FICO and Teletrack scores. This is most

likely due to Teletrack’s emphasis on information from subprime lenders

(including auto title lenders and RTO establishments, in addition to payday

lenders). The authors find that Teletrack scores have eight times the ability

to predict payday loan default as FICO scores. The authors also conclude that

credit card issuers would benefit from having frequently updated

information about whether their account holders are payday borrowers.

Taking out a payday loan doubles the probability of serious credit card

delinquency over the next year.

 

Applied Research and

Consulting LLC. 2009.

Financial Capability in

the United States: Initial

Report of Research

Findings from the 2009

National Survey. New

York: Applied Research

and Consulting LLC.

Individual-level

telephone

survey

1,488 U.S.

survey

respondents, of

whom 180

were

unbanked;

nationally

representative

Descriptive

analysis

Of all survey respondents, 5 percent reported taking out a payday loan in the

last five years. Eight percent of 18–29 year-olds took out a payday loan

compared with 7 percent of 30–44 year-olds, 7 percent of 45–59 year-olds,

and 2 percent of those ages 60 and over. Six percent of respondents making

less than $25,000 took out a payday loan, compared with 6 percent of those

making between $25,000 and $75,000 and 2 percent of those making over

$75,000. Eight percent of those with less than a high school education took

out a payday loan, as compared with 6 percent of those who graduated high

school, 6 percent of those with some college, and only 2 percent of

respondents who have more than an undergraduate college degree.

Of respondents considered unbanked (those without any depository

account), 8 percent reported taking out a payday loan in the last five years

and of those considered banked, 5 percent took out a payday loan. Of

respondents who felt they were not good at dealing with day-to-day

financial matters, 9 percent took out a payday loan in the past five years


Payday Loans 13

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

while 5 percent of those who considered themselves good at dealing with

day-to-day financial matters took out a payday loan.

Bertrand, M., and A.

Morse. 2009. “What Do

High-Interest Borrowers

Do with Their Tax

Rebate?” American

Economic Review:

Papers & Proceedings

99(2): 418–23.

Individual-level

survey;

administrativelevel data

Transactions

occurring

March–

September

2008 of 881

payday lending

customers

from 70 payday

lending

locations of a

national

payday lending

chain

Random

assignment

with 3

treatment

groups and 1

control group

OLS

regressions

DV: Individual

borrowed in a

given pay

cycle

DV: Amount

borrowed in

any particular

cycle

Disclosing how the fees accompanying a given payday loan add up over time

and disclosing the typical repayment profile of payday loans result in a

nontrivial reduction in the amount of payday borrowing. Individuals that

take up large payday loans (as a fraction of their income) are unaffected by

disclosures. The authors suggest that information disclosures might be more

effective policy tools if they are combined with well thought-out regulatory

limits on how much people can borrow at interest rates relative to their

payback capacity.

   

Elliehausen, G., and E. C.

Lawrence. 2001. Payday

Advance Credit in

America: An Analysis of

Customer Demand.

Washington, DC:

Georgetown University,

Credit Research Center.

Individual-level

survey

427 customers

who used a

payday loan in

the last year

from a

Community

Financial

Association of

America

Descriptive

analysis

Nearly all payday loan customers were aware of the finance charge for their

most recent payday advance, but few were able to report accurate annual

percentage rates despite recalling receipt of that information in truth-inlending disclosures. According to the authors, a likely explanation is that

payday loan customers used finance charges rather than annual percentage

rates in decisionmaking.

Most payday customers believe that people benefit from the use of credit

and that payday loan companies provide a useful service. Still, the majority

   
Payday Loans 14

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Elliehausen and

Lawrence 2001 (cont’d)

company of customers believe that payday loans are expensive, and a large

percentage of customers thought the cost of payday loans was higher than

fees for returned checks or late payments on debts. The small percentage of

customers who were dissatisfied with their most recent new payday loan

cited the high cost as the reason for their dissatisfaction.

A large percentage of customers considered obtaining funds from traditional

creditors, depository institutions, and finance companies. However, many

payday loan customers perceived limitations in credit availability and had

fewer alternatives than the population as a whole. Nearly three-fourths of

payday loan customers have been turned down by a creditor or not given as

much credit as they applied for in the last five years. Two-thirds of

customers considered applying for credit but changed their minds because

they thought they would be turned down. Payday loan customers tend to be

younger and married or unmarried with children, and a relatively small

percentage have low income or little education. The authors believe that the

use of high-cost credit may be economically rational for a large percentage

of payday loan customers.

Payday loan customers were less likely than the adult population to have a

bank or retail credit card. Though the quick and easy process for obtaining

the payday loan was most frequently cited as the reason for choosing a

payday loan, the authors believe that credit availability likely influenced the

decision to borrow. About one in five payday advance customers has high

consumer debt payments to income. The authors assert that payday loan

credit is more likely to be a consequence than the major cause of their

higher debt-payment burdens.

Many payday loan customers use payday loans regularly for short periods of

time. Over half of customers’ longest consecutive sequences of loans were

less than a month. Customers expressed disagreement with government

limits on the number of times a consumer can obtain payday loans during

the year.

   

FDIC Unbanked/

Underbanked Survey

Study Group. 2009. FDIC

National Survey of

Unbanked and Underbanked Households.

Unbanked/

Underbanked

Supplement to

the Current

Population

Survey

47,000 U.S.

households

surveyed in

2009;

nationally

representative

Descriptive

analysis

An estimated 6.6 percent of unbanked households, those currently without

a checking or savings account, have obtained a payday loan in the last five

years. Payday lending has been used by a larger proportion of unbanked

households that were previously banked. This may reflect the fact that

households generally need to have a bank account to get a payday loan. An

estimated 11 percent of previously banked households have used payday


Payday Loans 15

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Washington, DC: Federal

Deposit Insurance

Corporation.

FDIC 2009 (cont’d)

loans compared with only 2 percent of never-banked households. Among

unbanked households, payday lending customers used these loans more

frequently than other AFS credit customers use pawnshop or RTO

agreements. Of those unbanked households that used payday lending, 33

percent used payday lending at least a few times a year. Fifty-eight percent

of these households used payday lending once or twice a year.

Approximately 16 percent of underbanked households, those that have a

bank account but rely on alternative financial products, reported using a

payday loan in the last five years. Underbanked households that used

payday loans use them more frequently than underbanked households that

use pawnshop or RTO agreements. More than one-third (37 percent) of

underbanked households that used payday lending did so at least a few

times a year. Fifty-eight percent of these underbanked households used

payday lending once or twice a year.

Of underbanked households that used payday loan services in the last five

years, 43 percent did so because they felt it was easier to qualify for than a

bank loan. Sixteen percent of underbanked households turned to payday

lenders because they could not qualify for a bank loan. For one-quarter of

underbanked households, payday lenders were more convenient than

banks.
Payday Loans 16

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Fellowes, M., and M.

Mabanta. 2008. Banking

on Wealth: America’s

New Retail Banking

Infrastructure and Its

Wealth-Building

Potential. Washington,

DC: Brookings

Institution.

FDIC Institution

Directory;

infoUSA; storelevel data from

state and

federal

licensing

agencies

Census tract

locations of

banks, credit

unions, payday

loan providers,

pawnshops,

and check

cashers in 2007

Descriptive

analysis;

simulation

models

According to Fellowes and Mabanta’s inventory of basic financial service

locations, there are nearly 23,000 payday lenders in business and of those,

approximately 8,000 are located in low-income neighborhoods. Ninety-five

percent of all payday lenders are located within one mile of a bank or credit

union branch, and 84 percent are located in the same neighborhood or

census tract as a bank or credit union branch. This trend is consistent across

neighborhoods of all income levels. Fellowes and Mabanta conclude that

almost all payday lenders seem to be clustered around bank and credit

union branches and that this is consistent with the fact that payday lender

customers require their customers have a bank or credit union account to

use their services.

Based on these findings, Fellowes and Mabanta believe that the retail

infrastructure is in place to shift moderate- and lower-income workers’

demand for high-cost financial services to more affordable financial services

and possibly create pathways for savings to create even more wealth over

time. To measure the potential savings and investment wealth of

households, the authors simulate a number of different possible demand

and supply dynamics. They find that a typical payday loan customer, who

pays about $600 per year for short-term payday loans, could make about

$75,000 over her career if that money were instead invested in a diversified

portfolio. They note that such wealth would dissipate if she regularly relied

on overdraft funds as a substitute for payday loans; in most cases, payday

loans are preferable to overdraft protection plans.

The authors posit that most payday loan customers may instead prefer to

substitute their use of payday loans with a lower-cost alternative. Looking at

two alternatives (the North Carolina State Employees Credit Union and EE

Savings Bond), borrowers are expected to build moderate savings, similar to

if they had completely ended their payday loan consumption.

   
Payday Loans 17

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Flannery, M., and K.

Samolyk. 2005. Payday

Lending: Do the Costs

Justify the Price?

Washington, DC: FDIC

Center for Financial

Research.

Adminstrativelevel dataTwo monoline

payday lending

companies

operating 600

stores in 22

states

Multivariate

regression

DV: Store

profitability

Using store data from 2002, 2003, and 2004, Flannery and Samolyk find that

new payday lending stores (open for less than one year) generate negative

or low profits for a few years before becoming profitable. On a per loan

basis, Flannery and Samolyk find that total store operating costs—which are

the cost of store operations (e.g., wages, occupancy, advertising, other) and

the cost of default losses and loan-collection expenses—average $36 per

loan at young stores and $25 at mature stores. However, the average total

revenue of the mature stores ($349,000) exceeds that of the young stores

($253,000) by more than 38 percent. Mean store operating income (the

difference between total revenue and total store operating costs) per loan is

$9.8 for young stores, compared with almost $18.8 for mature stores.

Flannery and Samolyk find a relatively high average cost of originating

payday loans and find that default rates substantially exceed the customary

credit losses at mainstream financial institutions. Therefore, a company’s

rate of new-store formation substantially affects its profitability. However,

the location of the new-store formation has no influence on profitability.

After controlling for loan volume, the authors do not find that economic and

demographic conditions in the neighborhoods where stores are located have

an effect on profitability, although they do slightly influence default losses.

Flannery and Samolyk find no evidence that loan rollovers and repeat

borrowers affect store profits beyond their proportional contribution to

total loan volume. In other words, a store’s loan volume is a key determinant

of its profitability per se. These findings are reflective of the scant credit

analysis undertaken in connection with payday loans. The authors conclude

that fixed operating costs and loan loss rates do justify a large part of the

high APRs charged on payday loans.


Payday Loans 18

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Prager, R. A. 2009.

Determinants of the

Locations of Payday

Lenders, Pawnshops, and

Check-Cashing Outlets.

Washington, DC: Federal

Reserve Board.

County-level

data (Fellowes

and Mabanta

2008); FDIC's

Summary of

Deposits and

the Office of

Thrift

Supervision's

Branch Office

Survey; Census

Bureau

Counties with

bank and thrift

branches,

check cashers,

payday

lenders, and

pawnshops

OLS regression

DV: Payday

loan stores per

million capita

in urban or in

rural counties

Prager finds a positive significant relationship between the number of bank

branches per capita and the number of payday lending stores. Conversely,

an increase in limitations on the rates payday suppliers can charge is

negatively associated with the number of payday lending stores per capita.

The highest concentration of payday lending stores on a per capita basis are

in those southern states that do not explicitly or effectively prohibit payday

lending—Alabama, South Carolina, Tennessee, Mississippi, and Louisiana.

Prager also finds that credit scores are a strong predictor of AFS provider

concentration: counties where a larger percentage of the population has no

credit score have a greater density of payday lenders, pawnshops, and check

cashers, while counties where a larger percentage of the population has a

subprime credit score have increased concentrations of payday lenders and

pawnshops. She suggests that AFS providers may locate where the demand

for their services is likely to be greatest because a significant proportion of

the population does not qualify for more mainstream forms of credit.

 

Skiba, P. M., and J.

Tobacman. 2008. “Do

Payday Loans Cause

Bankruptcy?” Working

Paper.

Individuallevel data;

public record

personal

bankruptcy

petitions

provided

online through

Public Access

to Court

Electronic

Records;

personal

bankruptcy

filings in Texas

Bankruptcy

Courts

145,000

individuals

whose first

payday loan

application is

from a

company’s

Texas outlets

Regression

discontinuity

DV: Personal

bankruptcy

filing

Skiba and Tobacman find that payday loan applicants who were approved

for their first loans file for chapter 13 bankruptcy significantly more often

than applicants who were rejected upon first applying. The effect of access

to payday loans on bankruptcy is larger for monoline shops (where there is

likely less substitution between forms of credit) than stores offering payday

loans and pawn loans. To further explain, the authors demonstrate that

approval for one payday loan results in a pattern of future payday loan

applications: first-time applicants in the dataset who are approved apply, on

average, for 5.2 more loans than rejected first-time applicants over the next

12 months. In dollar terms, this results in $1,600 in loans and $300 in

interest payments. Skiba and Tobacman suggest that payday loan applicants

have a persistent demand for credit, so, having discovered a place where

credit is available, they return frequently.

To determine whether households borrow on payday loans to take

advantage of an upcoming bankruptcy filing, the authors compare the

interest costs from payday loans and applicants’ total debt interest burden

at the time of bankruptcy filing and find that payday loan interest

constitutes a nontrivial share of debt. The authors propose that these results

are consistent with the interpretation that payday loan applicants are

financially stressed; the first-time loan approval precedes significant

additional high-interest-rate borrowing and the consequent interest burden

 
Payday Loans 19

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Payday Loans

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Skiba and Tobacman

2008 (cont’d)

tips households into bankruptcy.

In the short-run, Skiba and Tobacman find that rejection of a first-time

payday loan application increases the probability of taking out a pawn loan.

However, they note that this effect dissipates quickly, and in dollar amounts,

it is small compared with the observed increase in subsequent payday

borrowing.

 
Refund Anticipation Loans and Checks 20

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Applied Research and

Consulting LLC. 2009.

Financial Capability in

the United States: Initial

Report of Research

Findings from the 2009

National Survey. New

York: Applied Research

and Consulting LLC.

Individuallevel survey

data

1,488 U.S.

survey

respondents, of

whom 180 were

unbanked;

nationally

representative

Descriptive

analysis

Of all respondents, 8 percent received an advance on their tax refunds

using a RAL in the last five years. Twelve percent of 18–29 year-olds and 11

percent of 30–44 year-olds used a RAL compared with only 4 percent and 3

percent of those 45–59 and 65 or above. Twelve percent of respondents

making less than $25,000 used a RAL compared with 7 percent of those

making between $25,000 to $75,000 and 3 percent of those making over

$75,000. Thirteen percent of those with less than a high school education

used a RAL, compared with 9 percent of those who graduated high school,

8 percent of those with some college, and 4 percent of those with a college

degree or more.

More African Americans, 13 percent, used a RAL in the last five years than

other racial/ethnic groups; 6 percent of Caucasians, 9 percent of Hispanics,

and 5 percent of Asians reported using a RAL. Of respondents who felt they

were not good at dealing with day-to-day financial matters, 11 percent

used a RAL in the past five years, compared with 6 percent of those who

said that they were good at dealing with day-to-day financial matters. Of

unbanked respondents, 16 percent reported the use of a RAL. Only 6

percent of those considered banked used a RAL.

 
Refund Anticipation Loans and Checks 21

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Barr, M., and J. K. Dokko.

(2008) “Third-Party Tax

Adminstration: TheCase

of Low- and ModerateIncome Households.”

Journal of Empirical

Legal Studies 5(4): 963–

81.

Detroit Area

Household

Financial

Services

survey

conducted July

2005– March

2006

938 low- and

moderateincome

households in

the Detroit

metropolitan

area

Descriptive

analysis

Of tax-filing households, unbanked households are twice as likely to take

out a RAL as banked households (60 and 30 percent respectively). Even

after controlling for income and employment, these results persisted.

Unbanked households make up 38 percent of RAL users, suggesting that

banked households use RALs in significant numbers. The unbanked are 20

percentage points more likely than banked households to use a national

chain, like H&R Block or Jackson Hewitt, when filing their taxes (60 percent

compared with 40 percent).

When analyzing how tax refunds were spent, the authors find few

differences between RAL users and non-RAL users. Nearly 80 percent of

households said they took out a RAL because they wanted to pay their bills

or other debt faster. Nearly half of respondents reported the importance of

taking out a RAL as a way to pay the tax preparer.

Though RAL-takers cite paying down debt as a contributing reason for their

RAL use, they are only 5 percentage points more likely to spend their tax

refund on bills and debt compared with non-RAL takers (82 percent

compared with 77 percent). Given the few differences in how RAL and nonRAL takers use their refund, Barr and Dokko feel that the receipt of a RAL is

not well correlated with how individuals spend the money.



Berube, A., and T.

Kornblatt. 2005. Step in

the Right Direction:

Recent Declines in

Refund Anticipation Loan

Usage Among LowIncome Taxpayers.

Washington, DC:

Brookings Institution.

IRS

Stakeholder

Partnerships,

Education and

Communication Return

Information

Database

(SPEC)

All tax filers

nationally

aggregated at

the zip code

level

Descriptive

analysis

Usage of RALs declined in tax year 2002 when compared with 1999 through

2001. At their peak in tax year 2001, over 14.1 million taxpayers received

RALs; this declined to 13.4 million in tax year 2002. This decline is not

appreciably explained by changing incomes or the percentage of volunteer

versus paid tax preparers.

More than half of RAL recipients were also earned income tax credit (EITC)

recipients (57 percent in 2002). In tax year 2002, 38 percent of EITC

recipients obtained RALs; just 7 percent of non-EITC recipients obtained

RALs.

Taxpayer purchases of RALs varies widely across the country. Nearly half of

all EITC recipients took out RALs in the South in tax year 2002, while less

than 30 percent of EITC recipients did so in the Northeast and West. Similar

variation exists across cities.

 

Elliehausen, G. 2005.

Consumer Use of Tax

Refund Anticipation

EXCEL, a

national twiceweekly

330 tax filers

who took out a

RAL based on

their tax year

Descriptive

analysis

The majority of RAL borrowers were repeat RAL users. Seventy percent of

RAL customers had obtained RALs in previous years. Nearly three-fourths

(72 percent) of RAL customers had three or more RALs in the past.

   
Refund Anticipation Loans and Checks 22

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Loans. Washington, DC:

Georgetown University,

Credit Research Center.

Elliehausen 2005

(cont’d)

individual-level

survey

conducted by

International

Communications Research;

Survey of

Consumer

Finances;

Survey of

Consumer

Attitudes

2003 refund Consumers’ primary reason for obtaining a RAL was to pay bills. Forty-one

percent of RAL recipients reported they used their refund to pay bills, of

which only 13 percent were from Christmas. Another 21 percent reported

that their refund went toward unexpected expenditures. Fifteen percent

reported not wanting to wait for their refund as the primary reason for

obtaining a RAL. Virtually all RAL customers knew that their tax-preparation

service offered electronic filing of tax returns. Nearly two-thirds of RAL

customers discussed with the tax preparer other options for receiving their

refund faster—such as electronic filing and direct deposit—before

obtaining a RAL.

RAL customers are disproportionately from lower- or moderate-income

households. Twenty-eight percent of RAL customers had incomes between

$15,000 and $24,999 and 16 percent of RAL customers had incomes

between $25,000 and $39,999. Nineteen percent of RAL borrowers had

incomes less than $15,000. Only 26 percent of RAL users had incomes of

$40,000 or more. Nearly half (47 percent) of RALs were for $3,000 or more.

Small loans were not very common: just 11 percent of RALs were for less

than $1,000.

Consumers using high-cost, short-term types of credit often have and

perceive few options for borrowing. Many RAL customers borrow from

other high-cost, short-term lenders. In the previous five years, 23 percent

of RAL users borrowed from a pawnshop, and 18 percent borrowed from a

payday loan company. Nearly half of RAL customers did not apply for credit

because they thought that they would be turned down. Nearly half of EITC

recipients that obtained a RAL reported being turned down or limited by a

lender in the last five years—more than two times the percentage of all

households experiencing turndowns or limitations and more than three

times the percentage of all households perceiving limitations in credit

availability.

EITC recipients were more likely than all households to have obtained a

RAL: 19 percent of EITC recipients obtained a RAL, compared with 8

percent of all households. Elliehausen suggests that the higher incidence of

RAL use by EITC recipients may be attributable to their disproportionate

likelihood to be in the early family life cycle that is associated with high

demand for credit. Thirty-six percent of EITC recipients are less than 45

years of age, are married, and have children, compared with 19 percent of

   
Refund Anticipation Loans and Checks 23

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

all households.

Most RAL customers lack awareness of the APR for their loans. Only about

a quarter of customers recalled receiving an annual percentage rate

disclosure and of those recalling receipt of an APR, 85 percent said that

they did not know the rate that was disclosed. This lack of consumer

knowledge suggests that RAL users are unlikely to have found APR

information useful in making their decisions.

FDIC Unbanked/

Underbanked Survey

Study Group. 2009. FDIC

National Survey of Unbanked and Underbanked Households.

Washington, DC: Federal

Deposit Insurance

Corporation.

Unbanked/

Underbanked

Supplement to

the Current

Population

Survey

47,000 U.S.

households

surveyed in

2009; nationally

representative

Descriptive

analysis

Among unbanked households, those currently without a checking or

savings account, 8 percent have used RALs within the last five years.

Previously banked households are more likely to have used RALs than

never-banked households. Almost 12 percent of previously banked

households used RALs compared with 4 percent of never-banked

households. Approximately 13 percent of underbanked households, those

that have a bank account but rely on alternative financial products,

reported using RALs within the last five years.



First Nations

Development Institute

and Center for

Responsible Lending.

2008. Borrowed Time:

Use of Refund

Anticipation Loans

Among EITC Filers in

Native American

Communities.

Longmont, CO: First

Nations Development

Institute.

County-level

data

EITC recipients

in AZ, MN, MT,

ND, NM, OK,

OR, SD, WA, WI

OLS regression

DV: RAL usage

A higher concentration of Native Americans and a greater level of

urbanization were each found to be predictors of higher rates of RAL

usage. Native counties are more likely to be rural, but also have higher

rates of RAL usage. Many of the counties with the highest use of RALs

among EITC filers using a paid preparer are very remote rural counties with

reservations. Findings suggest that patterns of RAL usage in some Native

communities may be different than other rural areas, and perhaps signal a

targeting of this particular population by paid tax preparers offering RALs.

In nine of the ten states examined in tax year 2007, counties with Native

land and at least 10 percent of the total population identifying as Native

American (Native-population communities) had higher rates of RAL usage

among EITC recipients than other counties in the state. In four states

(Minnesota, Montana, North Dakota, and South Dakota), RAL usage is at

 
Refund Anticipation Loans and Checks 24

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

least twice as high in Native-population counties.

Masken, K., M. Mazur, J.

Meikle, and R. Nord.

2008. “Do Products

Offering Expedited

Refunds Increase Income

Tax Non-Compliance?”

Paper presented at NTA

Annual Conference in

Taxation, Session on

Issues in Taxpayer Filing

and Tax Compliance.

IRS Tax Year

Individual

Income Tax

Reporting

Compliance

data

Individuals who

filed tax returns

in 2004

Propensity

scoring

Linear

regression

DV:

Misreported

tax liability as

a percent of

income

DV:

Misreported

tax credit

amounts

Taxpayers who used a RAL or RAC were more likely to misreport tax liability

as a percent of income. Audits of RAL users resulted in a change in net tax

liability 88 percent of the time compared with 76 percent for taxpayers

who did not use a RAL or RAC. RAL users defaulted at higher rates than

those not using a RAL or RAC (52 percent compared with 63 percent).

Taxpayers using RACs had a slightly higher average change in net tax

liability than those not using either a RAL or RAC (81 percent compared

with 76 percent).

The average age for audited taxpayers using a RAL was 33, similar to the

mean age of RAC users, 34. Non-RAL and RAC taxpayers are older,

averaging 43 years. Non-RAL or RAC users have significantly higher incomes

than those who used one of the products. The average adjusted gross

income of a non-RAL or RAC tax filer is $86,700 compared with $18,200 for

RAL users and $20,000 for RAC users. In addition, RAL and RAC users are

less likely to file a joint return than other taxpayers and are more likely to

live in the South. Masken and coauthors report similar findings when

analyzing the population of RAL and RAC users who are also EITC

recipients.


Refund Anticipation Loans and Checks 25

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Treasury Inspector

General for Tax

Administration. 2008.

Many Taxpayers Who

Obtain Refund

Anticipation Loans Could

Benefit from Free Tax

Preparation Services.

Washington, DC: U.S.

Government Printing

Office.

Individuallevel survey

data

350 taxpayers

whose tax year

2007 accounts

contained RAL

indicators

Descriptive

analysis

Based on survey responses, the authors conclude that if taxpayers were

aware that refunds could arrive in as few as five days (this timeframe is

based on a testing a new computer system), RALs might not have been as

attractive to them. Eighty-five percent of the 250 respondents who

confirmed receiving RALs stated that they would have been willing to wait

up to nine days to receive their tax refund. Only 167 (67 percent)

confirmed RAL recipients stated that their preparer explained how long it

would take for the taxpayers to receive their tax refunds if they chose not

to obtain the RAL. A review of IRS accounts for the 250 confirmed RAL

users showed that their tax refunds were issued to lenders within 14 days.

Twenty-six percent of the 250 respondents who used a RAL received debit

cards from the preparers. Sixty-three percent (157 of 250) of the

respondents stated that they would prefer to receive a debit card from the

IRS instead of getting a RAL.

Of the 250 respondents who stated that they had received a RAL, 213 (85

percent) obtained RALs because they wanted faster access to their tax

refunds and 185 (74 percent) used the money to pay bills. Another 14 (6

percent) used the money to buy or repair a car or for home repairs and

expenses. Eight percent stated they put the money in savings.

As reported by respondents who confirmed receiving a RAL, tax return

preparation and fees to obtain the RALs ranged from 5 to 25 percent of

taxpayers’ tax refunds. The average fee for respondents with tax refunds of

less than $2,000 was $183, compared to $338 for respondents with tax

refunds of more than $5,000.

  

Wu, C., and J. Fox. 2009.

Big Business, Big Bucks:

Quickie Tax Loans

Generate Profits for

Banks and Tax Preparers

While Putting LowIncome Taxpayers at

Risk. Washington, DC:

Consumer Federation of

America and National

Consumer Law Center.

IRS

Stakeholder

Partnerships,

Education &

Communication (SPEC)

Return

Information

Database for

Tax Year 2006;

company

reports

Individuals who

filed tax

returns; RAL

and RAC

companies

Descriptive

analysis

EITC recipients are overrepresented among the ranks of RAL consumers.

Though EITC recipients made up only 17 percent of individual taxpayers in

2007, IRS data show that in 2007 nearly two-thirds (63 percent) of RAL

consumers were EITC recipients, or 5.4 million families. In 2007, nearly

$523 million in EITC funds were spent on RAL loan fees. EITC recipients who

got RALs paid an additional $996 million in tax-preparation fees.

The price of RALs has declined significantly for some of the biggest

providers. In 2007, for taxpayers who received refunds, the average loan

amount was about $2,700. At that loan amount, a RAL loan fee was $104

to $111. In 2009, a consumer could expect to pay from $62 to $110. The

effective APR for an average RAL would be 77–140 percent. The price of

 
Refund Anticipation Loans and Checks 26

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Refund Anticipation Loans and Checks (RALs and RACs)

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Wu and Fox 2009

tax-preparation averages $183 for H&R Block and can be higher for other

preparers. Altogether, the consumer might pay about $245 to $293. If the

consumer chooses an independent tax preparer that charges a “document

processing” or “application” fee of $40 per loan, the total loan amount

could rise to as much as $285 to $333.

Independent preparers have about 70–75 percent of the paid preparer

market and 40 percent of the RAL market.

Some individual preparers and preparer companies receive incentives

when a consumer elects to receive a RAL. For example, Republic Bank &

Trust advertises on its web site an incentive payment of $6 per RAL. Santa

Barbara Bank & Trust pays $3 per RAL plus an additional payment of $1 to

$3 depending on the loan performance of RALs. H&R Block no longer

provides employees compensation per sale of RALs and RACs.

Several additional products have been introduced by leading RAL and RAC

providers. Both H&R Block and Jackson Hewitt introduced “pay stub” and

“holiday” RALs, loans made based on anticipated refunds before taxpayers

received their IRS Form W-2s and could file their returns. Jackson Hewitt’s

version is called the ipower Line of Credit issued by MetaBank. MetaBank

charges a 1.5 percent fee for the first advance from the line and a 10

percent charge per advance thereafter, plus 18 percent periodic interest.

Another product that tax preparers and their bank partners offer is an

“instant” same-day RAL. These instant RALs are available for an additional

fee ranging from $25 to $55. Starting in 2007, H&R Block dropped RAL loan

fees for those customers who received a RAL on the Block Emerald Card.

The Emerald Line of Credit carries an interest rate of 36 percent plus an

annual fee of $45.

 
Rent-to-Own Agreements 27

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Rent-to-Own (RTO) Agreements

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Anderson, M. H. and S.

Jaggia. 2008. “Rent-toOwn Agreements:

Customer Characteristics

and Contract

Outcomes.” Journal of

Economics and Business

61: 51–69.

Store

transaction

data

7,517 RTO

transaction

records which

originated June

2000– May

2002 from four

RTO stores (of

one small chain)

in AL, LA, and

MS

Log-normal

censored

regression

DV: Proportion

of rent paid

relative to

total rent if

contract went

to term

The authors find that 24 percent of RTO items are actually purchased,

based on transactions data. This contradicts the common perception that

60–70 percent of the goods are acquired under RTO, based on customer

survey data. Trying to reconcile the two yields a purchase rate of 43

percent.

Anderson and Jaggia find that actual rent paid by RTO customers is far

lower (median 14.7 percent of total) than the total rent customers would

have paid if the contract went to term. They conclude that this reflects, in

part, many customers who either return or purchase early. While some of

these returns are “failed purchases,” others reflect short-term need.

The working poor, customers who pay under biweekly and monthly (as

compared with weekly) payment schedules, and customers who pay late all

pay more rent.

The authors state that the data also highlight significant business risk.

Unfavorable charge-offs (merchandise written off as unrecoverable)

represent almost 13 percent of total charge-offs.

 

Anderson, M. H., and R.

Jackson. 2004. “Rent-toOwn Agreements:

Purchases or Rentals?”

Journal of Applied

Business Research 20(1):

13–22.

Store

transaction

data

352,646

transaction

records of RTO

customers from

100 stores in 46

states 1991–

2001 (95

percent of

transactions

originated

1998–2001)

Descriptive

analysis

The paper examines the disposition of RTO agreements and concludes that

they are more frequently used for short-term needs rather than as a

method of acquisition. Over 51 percent of RTO agreements result in the

merchandise being returned and 48 percent with the goods remaining with

the customer.

Interestingly, less than half of the returns (48 percent) were because the

customer needed a short-term rental. The remaining returns were for

collection problems (24 percent) and affordability problems (15 percent).

Also of interest, most of the purchases (56 percent) came through early

purchase—the customer paid a lump sum to buy before term. Early

purchase is thought to be less expensive than purchasing at term. Twentyfive percent of purchases (12 percent of all agreements) were made by

customers paying to term. Because only 12 percent of all agreements end

with the customer paying to term, the authors conclude that APR is not the

most useful information for customers. Instead, RTO contracts should

provide the purchase price at different points in time.

The authors reject the scenario that a significant number of RTO customers

are forced to return merchandise despite making scheduled payments

  
Rent-to-Own Agreements 28

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Rent-to-Own (RTO) Agreements

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Anderson and Jackson

2004 (cont’d)

nearly to the term of the RTO contract. They find that 90 percent of returns

occur with less than 36 percent of the scheduled weekly payments made.   

Applied Research and

Consulting LLC. 2009.

Financial Capability in

the United States: Initial

Report of Research

Findings from the 2009

National Survey. New

York: Applied Research

and Consulting LLC.

Individuallevel survey

data

1,488 U.S.

survey

respondents, of

whom 180 were

unbanked;

nationally

representative

Descriptive

analysis

Of all respondents, 5 percent used a RTO store in the last five years. Ten

percent of 18–29 year-olds used a RTO store, compared with 5 percent of

30–44 year-olds, 3 percent of those 45–59, and 0 percent of those 65 or

above. Sixteen percent of respondents making less than $25,000 used a

RTO store, compared with 4 percent of those making between $25,000 to

$75,000 and 1 percent of those making over $75,000. Seven percent of

those with less than a high school education used a rent-to-own store as

compared with 6 percent of those who graduated high school, 4 percent of

those with some college, and 1 percent of those with a college degree or

more.

More African Americans, 10 percent, used a rent-to-own store in the last

five years than other racial/ethnic groups; 4 percent of Caucasians, 4

percent of Hispanics, and 1 percent of Asians reported using a rent-to-own

store. Of respondents who felt they were not good at dealing with day-today financial matters, 7 percent used a rent-to-own store, as compared

with 4 percent of those who said that they were good at dealing with dayto-day financial matters. Of unbanked respondents, 14 percent reported

the use of a RTO store. Only 3 percent of those considered banked used a

RTO store.



FDIC Unbanked/

Underbanked Survey

Study Group. 2009. FDIC

National Survey of

Unbanked and

Underbanked

Households.

Washington, DC: Federal

Deposit Insurance

Corporation.

Unbanked/

Underbanked

Supplement to

the Current

Population

Survey

47,000 U.S.

households

surveyed in

2009; nationally

representative

Descriptive

analysis

Nearly 12 percent of unbanked households, those currently without a

checking or savings account, have used a RTO agreement in the last five

years. Of the unbanked, previously banked households were more likely to

have used RTO arrangements than never-banked households (18 percent

compared with 7 percent). Seventeen percent of unbanked households

that used RTO agreements used them at least a few times a year; nearly 40

percent used them once or twice a year. Forty-four percent of unbanked

households that used RTO agreement used them almost never.

Of underbanked households, those that have a bank account but rely on

alternative financial products, which used RTO agreements, 44 percent

used them once or twice a year and another 44 percent used them almost

never. Only 12 percent of these households report using RTO agreements

at least a few times a year.


Rent-to-Own Agreements 29

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Rent-to-Own (RTO) Agreements

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

Lacko, J. M., S. M.

McKernan and M.

Hastak. 2000. Survey of

Rent-to-Own Customers.

Washington, DC: Federal

Trade Commission.

and

Lacko, J.M., S. M.

McKernan and M.

Hastak. 2002. “Customer

Experience with Rent-toOwn Transactions.”

Journal of Public Policy &

Marketing 21(1): 126–

38.

Individuallevel survey

data collected

December

1998–

February 1999

12,136 U.S.

households of

which 532 had

used RTO within

the last five

years; nationally

representative

Descriptive

analysis

2.3 percent of U.S. households had used RTO transactions in the last year

and 4.9 percent, in the last five years. Compared with households who had

not used RTO, RTO customers were more likely to be African American,

younger, less educated, have lower incomes, have children, rent their

residence, live in the South, and live in nonsuburban areas.

Most (67 percent) of RTO customers entered the transaction intending to

purchase and most (70 percent) purchased. As a result, the authors suggest

that total cost and other terms of purchase should be provided on product

labels and in agreements. The authors state that APR disclosures and price

restriction policies raise more difficult questions, because they could be

subject to manipulation by RTO dealers, and price restrictions could limit

availability.

The authors state that careful analysis should be undertaken before

adopting policies that would substantially limit availability of RTO

transactions because most (75 percent) of RTO customers are satisfied with

their experience. Nineteen percent of RTO customers were dissatisfied,

with the major complaint being about high prices.

Nearly half of all RTO customers had been late making a payment and 67

percent of late customers reported the treatment they received from the

store when they were late was either “very good” or “good.” Eleven

percent of late customers reported possibly abusive collection practices.

The authors concluded that these results suggest that federal regulation of

industry collection practices may be unnecessary, but the most serious

abuses (such as unauthorized entry into customers’ homes) warrant

continued attention, even if not widespread.

  

McKernan, S. M., J. M.

Lacko, and M. Hastak.

2003. “Empirical

Evidence on the

Determinants of Rent-toOwn Use and Purchase

Behavior.” Economic

Development Quarterly

17(1): 33–52.

Individuallevel survey

data collected

December

1998–

February 1999

and

12,136 U.S.

households of

which 532 had

used RTO within

the last five

years; nationally

representative

Logit

regression

DV: RTO use

DV: RTO

purchase

Multinomial

logit

Consumers with lower incomes (except those with incomes less than

$15,000), less access to credit, less education, and that are African

American are more likely to use RTO transactions with the intent to

purchase. Based on these findings, the authors suggest that (1) consumers

using RTO transactions to purchase are likely to be drawn from lower

income levels but not necessarily the most disadvantaged groups; (2) RTO

customers uses the transactions because they lack other means to obtain

the merchandise, or at least obtain it as quickly; and (3) financial literacy

may enable consumers to better assess the cost and make more informed

   
Rent-to-Own Agreements 30

Small-Dollar Loan Products and Financial Services: Literature Review Matrix

Empirical Studies of Rent-to-Own (RTO) Agreements

Source Data

Sample/Study

population Method Findings Access

C

onsumer

Behavior/SubstitutesC

osts

FinancialliteracyLocationPolicy

McKernan, Lacko, and

Hastak 2003 (cont’d)

State law data

compiled from

industry

sources and

court

decisions

regression

DV: RTO use

with intent (1)

to purchase,

(2) to rent, (3)

unsure.

decisions.

State laws also are associated with RTO customers’ intention of purchasing

or renting from RTO stores. First, consumers living in states with total cost

label disclosure laws are less likely to use RTO to purchase than are

consumers living in other states, though this finding is not robust to all

model specifications. The authors state that if this finding is reliable, it is

consistent with a conclusion that some customers underestimate the cost

in the absence of total cost disclosures and that disclosures more fully

inform these consumers, leading some to make different decisions.

Second, customers in states with reinstatement laws are more likely to

ultimately purchase the merchandise than are customers in other states.

The authors state that this preliminary finding suggests that reinstatement

rights may benefit consumers by preventing the loss of merchandise if they

miss payments.

   