Examining payday loan utilization among households with mainstream credit access

Abstract

Purpose

This study aims to gain insight into the motivations behind the decision to use high-cost payday loans by households who possess mainstream credit and to determine whether this behavior has changed over time.

Design/methodology/approach

Using data from Statistics Canada’s Surveys of Financial Security, probit models are used to examine the sociodemographic and financial indicators associated with payday loan use.

Findings

The analysis uncovers the sociodemographic and financial characteristics of payday loan-user households with access to lower-cost short-term loans. The findings indicate that the likelihood of payday loan use has risen over time. Additional analysis reveals that indicators of financial instability are positively associated with payday loan use among this group.

Research limitations/implications

This research highlights the dichotomy of payday loan users and recommends policymakers tailor solutions to the specific needs of different types of payday loan users.

Practical implications

This research highlights the distinguishing sociodemographic and financial characteristics of payday loan user households and recommends policymakers tailor solutions to the specific needs of different types of payday loan users.

Originality/value

This is the first study, to our knowledge, to focus analysis on payday loan use of those with access to lower-cost short-term credit alternatives in Canada and to include measures of financial instability in the analysis. This research is timely given the current economic environment of high interest rates and high levels of household debt.

Citation

Lamb, L. (2024), "Examining payday loan utilization among households with mainstream credit access", Journal of Financial Economic Policy, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFEP-08-2023-0242