High-Cost Consumer Credit: Desperation, Temptation and Default

Joaquín Saldain

Staff Working Papers from Bank of Canada

Abstract: I study the welfare consequences of regulations on high-cost consumer credit in the United States. I estimate a heterogeneous-agents model with uninsurable idiosyncratic risk, risk-based pricing of loans, and preference heterogeneity including households with self-control issues. I find that one-third of high-cost borrowers suffer from self-control issues. Noncontingent regulatory borrowing limits have distributional consequences within households with self-control issues. High-income households benefit from restrictions on borrowing because they face loose price schedules from lenders that allow them to overborrow. Low-income households face tight individually targeted loan price schedules that limit households’ borrowing capacity so that borrowing restrictions cannot improve welfare over them.

Keywords: Credit and Credit Aggregates; Financial markets; Interest rates (search for similar items in EconPapers)
JEL-codes: E2 E71 G51 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-01
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:25-6

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