Can payday loan bans and financial literacy benefit consumers?

Eric McKee, Oscar Solis and Wei Zhang

Finance Research Letters, 2025, vol. 79, issue C

Abstract: By exploiting variation in the payday loan availability induced by state-level regulation changes, we investigate the impact of payday loan bans on consumers’ credit outcomes and financial welfare. We find that consumers in states with new bans significantly reduced the usage of payday loans and alternative financial services (AFS) and experienced a lower likelihood of difficulty in paying bills and mortgages relative to those in other states. Furthermore, both the credit and welfare effects are stronger for consumers with lower levels of financial literacy. These individuals experienced greater reductions in payday loan and AFS usage, as well as economic hardship. In contrast, high-literacy consumers used payday loans less in the first place and derived fewer benefits from the bans. Our results highlight the important role of financial literacy in mitigating the adverse effects of payday loans.

Keywords: Financial literacy; Payday loans; Alternative financial services; Financial welfare (search for similar items in EconPapers)
JEL-codes: D12 D14 G51 G53 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:79:y:2025:i:c:s1544612325005896

DOI: 10.1016/j.frl.2025.107326

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