Tough Times Borrowing: Effects of Fringe Lending Regulation on Credit Standing, Search, and Access
Poor access to credit has long been theorized to contribute to poverty and economic inequality. However, costly fringe credit products like payday loans may be even more harmful. Critics call for strict regulation of such products, while the empirical evidence on the effects of fringe borrowing is mixed. We use data from a credit bureau on a well-matched national sample of the U.S. military personnel to assess how regulation on fringe lending at the federal level (through the Military Lending Act, or MLA) and payday lending bans at the state level affected credit standing, search, and access of likely fringe borrowers. We find no long-term effects on credit standing and no increase in search for new credit, on average. However, credit access improved after the MLA and search for credit intensified during spells of severe credit constraint. The MLA and the state bans also shortened the duration of such spells. These results suggest a strategic but myopic borrower, whose set of salient credit options can be altered by regulation, resulting in substitution of fringe loans with less costly mainstream credit. We conclude that long-term trends in studies of credit can be misleading, and that studying short-term dynamics of poverty can lead to better theory and policy.