Arkansas Tech Professor Investigates Payday Loan Cycle of Debt

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Jan 18, 2012, 08:30 ET

RUSSELLVILLE, Ark., Jan. 18, 2012 /PRNewswire-USNewswire/ -- Arkansas Tech University Prof. Marc Anthony Fusaro is the principal investigator on an important new study regarding whether the high interest rates on so-called "payday" loans cause borrowers to be trapped in a "cycle of debt."

Critics of payday lending assert that borrowers are required to devote scarce cash resources to payment of the finance charges on payday loans and therefore have inadequate funds to repay the loan principal; as a result, the critics argue, consumers are caught in a "cycle of debt" or "debt trap."

Prof. Fusaro and his co-investigator, Patricia J. Cirillo, Ph.D., of Cypress Research, conducted a field experiment in which a random sample of borrowers were given interest-free payday loans. The investigators then tracked these borrowers and found no difference in loan repayment rates between the zero-interest borrowers and a control group of borrowers who paid conventional payday-loan interest rates. This result forms strong evidence that high interest rates on payday loans are not the cause of a "cycle of debt."

The study is important because the "cycle of debt" has long been asserted as a basis for limiting or banning payday loans, but without any research of academic quality to support the assertion. The study refutes the existence of a "cycle of debt." "Our results indicate that high interest rates do not convert occasional users to chronic users," Prof. Fusaro and Dr. Cirillo note in their conclusion. The authors did not study the broader question of whether payday loans are welfare-enhancing for consumers, an issue that has been considered in multiple settings by other investigators to mixed results.

The results are consistent with prior survey research showing that only 2% of borrowers cite difficulty in getting out of debt as a cause of dissatisfaction with their loans.

The study is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.

SOURCE Arkansas Tech University