EFFECTSOFGOVERNMENTLEGISLATIONANDREGULATIONOFPAYDAYLOANS
INCANADA:
ANECONOMICANALYSIS
By
WilliamB.Kluska
ThesissubmittedinpartialfulfillmentoftherequirementsfortheDegreeof
BachelorofArtswith
HonoursinEconomics
AcadiaUniversity
April,2017
©CopyrightbyWilliamB.Kluska2017
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iii
ThisthesisbyWilliamB.Kluska
isacceptedinthepresentformbythe
DepartmentofEconomics
assatisfyingthethesisrequirementsforthedegreeof
BachelorofArtswithHonours
ApprovedbytheThesisSupervisor
____________________________________________________________________
Dr.AndrewDavis Date
ApprovedbytheHeadoftheDepartment
____________________________________________________________________
Dr.BurcKayahan Date
ApprovedbytheHonoursCommittee
____________________________________________________________________
Dr.JunYang Date
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I,WILLIAMB.KLUSKA,grantpermissiontotheUniversityLibrarianatAcadia
Universitytoreproduce,loanordistributecopiesofmythesisinmicroform,paper,
orelectronicformatsonanon-profitbasis.I,however,retainthecopyrightinmy
thesis.
_________________________________________________
SignatureofAuthor
______________________
Date
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Acknowledgements
Iwouldliketothankanumberofindividualswhohaveassistedmethroughthe
processofwritingthispaper:Dr.AndrewDavisandDr.BurcKayahanforoffering
guidanceandsupport,LauraO’HearnfromServiceNovaScotiaforprovidingme
withaggregatedatafromtheprovince,andRonGauthierfromThomsonReutersfor
hisassistanceinprovidingbusinessregistrydatafromprovincesthatdidnotoffer
theinformationIneededwithouthighfeesormonthlysubscriptions.
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TableofContents
Acknowledgements.................................................................................................................................viiListofTables................................................................................................................................................xiListoffigures.............................................................................................................................................xiiiAbstract........................................................................................................................................................xv1.IntroductionandLiterature...............................................................................................................12.PaydayLoansMarketinCanada......................................................................................................93.Legislation..............................................................................................................................................194.MethodologyandResults.................................................................................................................274.1DataandMethodology...............................................................................................................274.2IssueswithDataAvailability...................................................................................................294.3VariableSelectionofFirstSpecification............................................................................314.4RegressionAnalysisofFirstSpecification........................................................................374.5VariableSelectionoftheSecondSpecification...............................................................494.6RegressionAnalysisoftheSecondSpecification...........................................................554.7CombinedSpecificationAnalysis..........................................................................................65
5.Conclusion..............................................................................................................................................676.Appendix.................................................................................................................................................697.References..............................................................................................................................................73
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ListofTables
Table1:VariableSelectionReasoning(1stSpecification)......................................................33Table2:CharacteristicsofaPaydayLoanBorrower(1stSpecification)..........................39Table3:VariableExplanation(1stSpecification).......................................................................41Table4:IndependentVariableSelectionReasoning(2ndSpecification).........................50Table5:EffectofWeightedInterestRateCapsonHouseholdBankruptcyRates(2ndSpecification).............................................................................................................................................56Table6:VariableResultsExplanation(2ndSpecification).....................................................59
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Listoffigures
Figure1:PaydayLoanOperationDevelopment.........................................................................12Figure2:ProvincialShareofTotalPaydayLoanOperations...............................................13Figure3:PercentageofRepeatLoansinNovaScotia(2010–2016)...............................15Figure4:NovaScotiaPaydayDefaultRatev.NationalNon-MortgageDefaultRate..16
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Abstract
Almosteveryonehasunexpectedpersonalfinancialdifficultiesattimes.Lowincome
orhighcreditriskindividualsmaybelimitedintheiravailableoptionstosmooth
outandmanagetheimpactsoftheseshocks.Manysuchhouseholdshavelimited
accesstotraditionalformsofcredit,suchascreditcardsandlinesofcredit,orhave
maxedoutthesealternatives.Thepaydayloansmarketisoneoptiontomitigatethe
adverseeffectsoftheseshocks.However,theinterestratesattachedtotheseloans
aresignificantlyhigherthantraditionalformsoflending.Thecostsofpaydayloans
haveraisedquestionsaboutwhetheraccesstothisformofcreditisbeneficialfor
consumers.Ilooktoanswerwhetheraccesstopaydayloansiswelfareenhancingor
detrimentalwithintheCanadianmarket.
xvi
1
1.IntroductionandLiterature
A growing body of economic literature looks to analyze the net benefit of
payday loansbycomparing theoptionvalueattached toaccess topayday loans to
the high cost associated with these loans. There is no unambiguous answer to
whetherthebenefitofincreasedaccesstocreditoutweighsthecost(Meltzer2011).
The reasons for use of a payday loan can be simplified into two main
categories. The first reason is that borrowers simply do not have enough savings
available to handle a personal financial shock (Stegman 2007). This can be
somethingassimpleasanecessarycarrepairrequiredtomaintainemployment,or
as dire and complex as requiring additional funds in order to prevent eviction or
foreclosure.Secondly,aborrowermaybeforcedtouseapaydayloanfromalackof
alternativeformsofcredit.Notallconsumershaveaccesstoacreditcardorother
formsof lendingvehicles.Also, credit informationaboutborrowershas increased,
whichhasincreasedtheselectivenessoflendinginstitutions(DavisandKim2017).
Alackofsavingscanbedividedintothreesubcategories.First,manypayday
loanborrowersareconsideredtobeoflowormoderateincome;hencetheysimply
may not have the ability to save (Stegman 2007). Their regular income may be
stretchedacrossallexpenses,suchthatasmallchangeintheirpersonalfinancescan
have serious effects. Second, their lack of savings can also be attributed to poor
financialliteracy(Stegman2007),andalackofunderstandingofhowtosaveforthe
futureandpreparesomeformofcushiontohandleanunexpectedshock(Ausubel
2
1991). Finally their lack of savings can be due to myopic time preferences. The
borrower can have a time discounting rate that puts their preference for higher
consumption in the current period at a level that is unsustainable (Jones and
Mahajan2015).Insimpleterms,theindividualislivingbeyondtheirmeans.
The secondmain reason for the low income individual to require apayday
loan is based on a lack of solid alternative forms of credit. Most low income
individualswill not go to apayday loan as their first source for credit borrowing;
rather they look to a payday loan as a last resort. The lack of a reasonable credit
alternativecanbeattributedtoavarietyofdifferentfactors.DavisandKimexplain
thatrecentchangesinaccesstoinformationaboutborrowershaspushedmanylow-
income borrowers out of the credit card market entirely as the risk profile
associatedwithsomeoftheseborrowersishigherthancreditinstitutionsarewilling
toaccept(DavisandKim2017).Additionally,theissueofmyopictimepreferences
canalsoaffectaborrower’saccesstoalternativecreditoptionsasmanypaydayloan
borrowershavemaxedoutallofthesealternatives.
Given the variety of factors impacting borrowers’ decisions to use payday
loans,theeconomicliteraturehasstruggledtoreachaconsensusintheirassessment
ofthebenefitsandcostsassociatedwithpaydayloans,asbothareconsideredtobe
very subjective and ambiguous in magnitude (Morse 2011). Difficulty also arises
from the lack of information on how borrowers use these funds, as well as the
factorscausingthemtoengageintheseborrowingactivities.
Instead of looking at measures of the direct impact of payday loans and
whethertheirusagedirectlyimprovestheaverageborrower,manyauthorslookto
3
measure the impacts associated with simple access to these loans and whether
improvingaccesstranslatesintowelfare-enhancingeffects.
Meltzerusesproximitytopaydayloanfacilitiestoevaluatetheimpactonfive
hardshipmeasures,specificallydelays inneededhealthcare,difficultypayingrent,
mortgageandutilitybills,householdfoodinsecurity, lackoftelephoneservice,and
moving out of one’s home due to financial difficulties (Meltzer 2011). His paper
concludesthatimprovedaccesstocreditcaneaseimmediatefinancialdistress,but
can exacerbate hardship among individuals with forecasting or self-control
problems,whoborrowtoincreasecurrentconsumption,butsufferinthefuturedue
toalargedebtserviceburden.1
Kurban’s analysis focuses on lower income communities in the southern
UnitedStates(Kurban2014).Heidentifiespaydayloanaccessbenefitsrelatedtothe
easeandspeedassociatedwithborrowingrelativelysmallamountswhencompared
toborrowingorattemptingtoborrowfromtraditionalsources.However,overallhe
findsthattheeaseofborrowingtranslatedtorepeatborrowing.Heconcludesthat
thehighinterestraterevenuefromtherepeatborrowingadverselyimpactsboththe
borrowers and the community. He observes that the profits generated are
transferredoutof the community to thebenefit of shareholders elsewhere, rather
thanbeingreinvestedinthecommunity’seconomy.
Morse found that the availability of payday loans arewelfare enhancing in
California following a natural disaster, but counters this benefit with the concern
1HisconclusionalsocoincideswiththatofO’DonoghueandRabin2006.
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that “… the availability of cash from payday loans may tempt individuals to
overconsume.”(Morse2011)
Although there is no consensus in the literature, there is more robust
evidencesupportinganegativeimpactofaccesstopaydayloans.2Asthepreceding
examplesdemonstrate,acommonrecurringthemewithinalltheliteraturereviewed
is that borrowers may be myopic. While most authors discuss this issue from a
qualitative perspective, Jones and Mahajan crafted an experiment in a “natural”
setting,attemptingtoquantifytheaveragetime-discountingpreferenceamonglow-
incomehouseholds.Theypresentasampleoftaxfilerstheoptiontosavetheirtax
refunds in an approved, liquid, savings vehicle. If they agree, they receive an
incentivebonus.Iftheyfollowthroughwithsavingtherefundforninemonths,they
receiveanadditionalincentive.Asecondgroupoftaxfilerswerepresentedwiththe
optiontosavetheirrefundsinanapproved,butbindingorilliquid,savingsvehicle.
Basedontheresultsoftheirresearch,JonesandMahajanconcludethattheaverage
annualdiscounting rate is164%among low-incomeearners. Inotherwords,until
youoffereda164%annualrateofreturnforsavingforoneyear,theaveragelow-
incomeearnerwouldchoosetospendthemoney,ratherthansaveit.
2TakenfromMeltzer2011“Twostudiesdetectnegativeeffects:(SkibaandTobacman2008)findgreaterratesofchapter13bankruptcyfilingsamongpaydayborrowers,and(CarrellandZinman2008)finddeclinesinjobperformanceandreadinessamongAirForcepersonnelstationednearpaydaylenders.Threestudiesfindbenefitsofpaydayloanavailability:(Morse2011)findslowerforeclosuresfollowingnaturaldisasters;(MorganandStrain2008)findlowerratesofbouncedchecksinGeorgiaandNorthCarolinabeforepaydayloanbans;and(Zinman2010)identifiesdeteriorationinsubjectiveassessmentsoffinancialwell-beingafterOregonrestrictspaydaylending.InafieldexperimentinsouthAfrica,(KarlanandZinman2010)alsofindthatimprovedcreditaccessincreasesratesofemploymentandimprovesfoodsecurity.”
5
Thiscanweakenthenegativecorrelationbetweenwelfare-enhancementand
increased access to credit as it becomes difficult to determine if the high interest
ratesarecausingexacerbatinghardshiporifitismyopicspendingthatpushesthem
furtherintofinancialtrouble.
Thispaperlookstoaddtothecurrentbodyofeconomicresearchbyfocusing
on the changes in government legislation and regulation and its specific impact
withintheCanadianmarket. InthispaperIconductamultipleregressionanalysis,
utilizingdatafromanumberofCanadianhouseholdsurveysandadministrativedata
on the nature of the payday loans industry. I estimate whether access to payday
loansaffectshouseholdbankruptcyrates,and investigatewhat typesofborrowers
use payday loans. My identification strategy for estimating the effect of access to
payday loans is based on exploiting political discontinuities in payday loans
regulation across provinces. I use data from the Consumer Financial Capability
Survey to estimate the effects on bankruptcy rates and the Survey of Financial
Securitytooutlinethecharacteristicsofpaydayloanborrowers.
In comparing interest rate restrictions across Canada, I find that relaxing
interestratecapsexhibitpositivecorrelationwithpaydayloanusage,indicatingthat
creditrationingisasignificantfactorasinterestratecapsarerestricted.Thismeans
thatas interest rates increasemoreborrowersusepayday loanservices. I suggest
thisisduetoanincreasedsupplyofpaydayloanswhentheinterestrateisrelaxed.
This allows more individuals with higher credit risks to use a payday loan. One
suggestiontocombatthehighcostofpaydayloansistoenforceusurylawsandcap
the interestratesatanannualrateof60%.Stegmansuggests thatenforcingusury
6
lawsmayforcehigh-riskborrowerswhoareunabletoobtainaloanatthatrate,into
theillegalorundergroundlendingmarket(Mayer2012).
I believe this correlation also reflects the desperation of somepayday loan
borrowers. Individualswho have no alternatives to borrowmay look to a payday
loanasanalternativesourceofcreditregardlessoftheinterestrate.However,when
interest rates are relaxed and the supply of payday loans is increased, more
aggressiveadvertisingpracticescantakeplace,whichcanalsocontributetoahigher
correlationbetweenrelaxedinterestratecapsandpaydayloanusage.
I also find evidence that relaxing interest rate caps among provinces is
positivelycorrelatedwithhouseholdbankruptcyrates.Bycombiningtheresultsof
my two specifications I suggest that the probability that a household declares
bankruptcy,giventhattheyuseapaydayloan,ispositivelycorrelatedwithrelaxed
interestrates.
Theissueofcontinuousborrowingandoverborrowingexacerbateshardship
among borrowers further. The capacity of a borrower to acquire a loan amount
aboveafeasiblelevelforthemtorepayontimecanforcethemintoadebtburden
cyclethatisextremelydifficulttorecoverfrom(O’DonoghueandRabin2006).This
canleadtoanissueofcontinuousborrowingwhereaborrowerisforcedtorelyon
regular loans to cover the previous loans and debt service costs. This has led to
various regulations to curb the problem of over borrowing and repetitive loans. I
findthatborrowerswhoengageinrepetitiveloansare9.85%morelikelytodeclare
bankruptcy,thanindividualswhodonotenterthepaydayloansmarket.However,
solving the issues of over borrowing and continuous borrowing is difficult.
7
Implementing percentage of income caps can push borrowers out of the market
entirely and move them to underground and illegal sources (Stegman 2007).
Percentageofincomecapsarerestrictionsontheamountinwhichaborrowercan
borrowgiventheirincome.Forexample,inBritishColumbiaaborrowercannottake
out a loan that exceeds 50% of their net pay per paycheck. Additionally, forcing
lenders to stop offering loans to repeat borrowers can put borrowers into a
financiallyworsepositionthanbeforetheytookouttheloan(Meltzer2011).
Therestofthispaperisdividedintothefollowingsections.First,Ireviewthe
payday loans market within Canada, outlining the history and structure of the
market. I highlight current statistics using personally collected data along with
aggregategovernmentdata. I identifyareas thatmaybeof concernbothcurrently
andinthefuture.Next,IreviewtheCanadianlegislationpertainingtopaydayloans
and its evolution over the last 30 years. I explore the differences in provincial
legislation and the impact that these discontinuities have on the market. Third, I
present the details of the estimation methodology and results of the analysis.
Finally, I concludewithpolicy recommendations to assist in shaping legislation to
reduceopportunitiesformarketfailurestodominate,whichmeansthatthemarket
initscurrentformmayhavesolutionsavailablethatwouldmakeborrowersbetter
offwithoutmakinganyoneelseworseoff.
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2.PaydayLoansMarketinCanada
Apaydayloanisaloanbetween$100and$1,500thatistobepaidbackatthe
timeoftheborrower’snextpaycheck.Itisdesignedasanemergencybridgeloanto
allowtheborrowertopaysomeimmediatecosttopreventsomedireconsequence.
PaydayloansfirstcameintoCanadaintheearly1990’s.Theyareavariationfroma
practice called “salarybuying”which firstbecamepopular in the late19th century
(Birkhead1941).SalaryBuyingwasaprocess inwhicha lenderwouldpurchasea
futuresalaryofaborroweratadiscountinordertoprovidetheborrowerwiththe
fundsimmediately.Theprocessofsalarybuyingbecameillegalinthe1970’swhen
the majority of the loans were offered through criminal organizations and loan
sharks.Additionally the interestchargesassociatedwithsalarybuyingwereabove
the legal limitof60%annually.Payday loansaredifferent fromsalarybuying ina
fewdifferentways,whichwillbefurtherdiscussedinthelegislationsectionofthis
paper.However,thetwoprimarydifferencesarethatapaydayloanhasarestriction
of how much can be borrowed relative to the borrower’s earnings, and the fee
associatedwith the loan is to bepaid at the timeof payment.With salarybuying,
therewasnorestrictionontheamountofthesalarythatcouldbeborrowed,andthe
interestwasdeductedfromtheamountlentimmediately.
Fromthe1990’s to2006payday loansremainedrelativelyunregulatedand
not legislated.Theusury lawofCanadaand itsambiguous interpretation isoneof
the main reasons why payday loans have been able to maneuver outside the
restriction of 60% annual interest (Antle 1994).Where the payday loans are of a
10
small amount and for a short term they have been able to avoid these laws and
operatemorefreely.In2006theCriminalCodeofCanadawasamendedwithBillC-
26 to specifically include payday lending operations and create a base set of
restrictionstobeimposedontheirpractices.Theserestrictionsdidnotenforcethe
traditionalusurylaws,butrathersetrestrictionsonamountsthatcanbeloaned,and
amaximumloanperiodbasedupontheborrower’spayschedule.Theamendment
also left it open for each province to impose individual regulation and legislation
basedupontheirprovincialrequirements.
Since 2006, the payday loan industry has drastically increased operations
withinCanada.Basedonpersonal research into thebusiness registrationsof each
enterpriseineachprovincialregistry,Ideterminedthattherearecurrentlyover150
distinctpayday-lendingoperationswithinCanadawithover1,400 locationsacross
the country. Based on a scan of legislation in each province, all provinces have
created some form of customized legislation and regulation of the payday loans
industry–exceptforNewfoundland.
In addition to the expansion of physical locations of payday lending
operations, onlinepayday lendinghasbecomea significantly largerportionof the
industrysince2009,whichhasforcedmanyprovincestoamendtheirlegislationto
includeonlinelendingpractices.Basedonmyreviewofnewbusinessregistrations,
ineachprovince,thenumberofpaydaylendingstart-upoperationshasgrowneach
yearsince1995withfewexceptions.
In2005,concernsregardingpendinglegislationrestrictionslikelyactedasa
deterrent formany start-ups as indicated in the Figure 1: Payday LoanOperation
11
Development. 2009was themost active year for payday loan operation start-ups.
Thiswasmainlyduetotheincreaseofonlinepaydaylendingoperationsandthelack
of legislation regarding online lending. After 2009, the payday lending operations
began to amalgamate. Economies of scale became apparent as national brands
emerged.
Currently there are only 2 payday lending organizations present in every
province: Money Mart and Cash Advance. Each company has taken an opposite
approach to expansion. Based on a review of business registrations, I identified a
significantnumberofcompaniesthatwereacquiredbyMoneyMart,butdidnotsee
the same pattern with Cash Advance. Cash Advance appears to have built its
organization through construction and expansion of its own storeswith relatively
minimal mergers and acquisitions. Money Mart appears to have focused
predominately on acquiring payday lending operations that are successful in
provincesandlocationsthattheyhaveminimalornopreviouspresence.
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Figure1:PaydayLoanOperationDevelopment
Source:Personallycollecteddatafromprovincialbusinessregistries
Muchof theeconomic literaturehasexplored thesignificanceof locationof
payday lending operations. The issue of added convenience within low-income
communities has beendifficult to quantify, as these individuals are the onesmost
likely to be in need of additional access to credit. One might expect that the
provinceswiththehighestpopulationswouldhavethegreatestnumberofpayday
loan operations, however, looking at personally collected data on the number of
operationswithineachprovince,BritishColumbiaandNovaScotiaseemtohavethe
highest number of payday lending operations per capita. This is likely due to the
probabilityoflowerincomeindividualsinNovaScotiaandthehighercostofliving
associatedwithBritishColumbia.
0
2
4
6
8
10
12
14
Num
berofnew
operations
PaydayLoanOperationDevelopment
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Figure2:ProvincialShareofTotalPaydayLoanOperations
Source:Personallycollecteddatabasedonactive2016provincialbusinessregistries.
The marketing practices of the payday lending operations within Canada
havebeenfocusedheavilyaroundindividualswhomayhavepoorbudgetingorlack
needed credit to maintain consumption habits. The main emphasis of payday
lendingmarketing is getting cash immediately regardless of the reason. They also
focusontheuseofanadministrativefeeratherthanarateofinterest,stating$15-
$25per$100lent(dependingontheprovince).
AB,11.41%
BC,24.16%
MB,5.37%
SK,6.04%
ONT,25.50%
OUE,5.37%
NB,5.37%
NS,8.72%
NFLD,5.37%PEI,2.68%
ProvincialShareofTotalCanadianPaydayLoanOperations
14
Thefact that thesecorporations focustheiradvertisingonthosewhomight
be considered to have myopic time preferences3, rather than true emergencies,
mightbeconstruedtobeencouragingborrowingthatisnotwelfare-enhancing.
A large concern regarding payday-lending operations in Canada is the
propensity for payday loan borrowers to engage in continuous or repetitive
borrowing.Mostprovincesdonottracktheborrowinghabitsofpaydayloanusers.
Infact,onlyNovaScotiahasmandatedthatallpayday-lendingoperationswithinthe
provincemust be tracked and data sent to the provincial government for further
analysis.Albertahas implementedlegislationtoenforcesimilartrackingtostart in
2017.
From the aggregate data available from Service Nova Scotia (Figure 3:
Percentage of Repeat Loans in Nova Scotia (2010 – 2016)), it is apparent that
concerns about habitual lending expressed in other papers, are justified in Nova
Scotia, despite the specific legislation in place to prevent continuous or habitual
lending practices. Since 2014, there has been an increase of as much as 20% in
repeatloansoverfirsttimeloans.Additionally,29.65%ofallrepeatloanswereloans
grantedtoborrowerswhohaveusedpaydayloans8ormoretimeswithintheyear
ofrecording.
3“Myopictimepreferences”referstoindividualswhowilllookforanyreasontoincreaseconsumptiontoday,evenifthecostofservicingthedebtisextremelyhigh.Theyprefertoconsumesignificantlymoretodayandmaynotconsiderthelackofconsumptionwithwhichtheywouldbefacedinthefuture.
15
Figure3:PercentageofRepeatLoansinNovaScotia(2010–2016)
Source:ServiceNovaScotiaPaydayLoanAggregates
The tendencyofhabitual lendingadds to the concern that theseborrowers
have fallen intoadifficult financialcycle,where the initial loanmayhavebeen for
some form of financial or consumption shock, but the continuous nature of their
borrowinghabitsmayindicateahigherchanceofdefault.
24.39%
13.35%
9.79%7.61% 6.92%
4.71% 4.21%
29.65%
0%
5%
10%
15%
20%
25%
30%
35%
1Repeat 2Repeat 3Repeat 4Repeat 5Repeat 6Repeat 7Repeat 8ormore
PercentageofRepeatLoansinNovaScotia2010-2016
16
Figure4:NovaScotiaPaydayDefaultRatev.NationalNon-MortgageDefaultRate
Sources:Aggregatedefault rate fromServiceNovaScotia andDefault rateofnationalnon-
mortgagedebtprovidedbyTransUnionCanada
Again usingNova Scotia aggregate data, Figure 4 shows the default rate of
payday loans is almost three times larger than the default rate of any other non-
mortgagedebtwithinCanada.Thoughthiscomparisonisnotrobust,itdoesindicate
alargeconcernregardingpaydayloanborrowers’abilitytorepaytheloanswithout
requiringadditionalpaydayloanstocoverregularexpenses.4
The average amount borrowed is approximately $436. An interesting
question thatarises from theaverageamountborrowed iswhatproportionof the
borrowers is borrowing at the maximum allowed amount based on income4Thiscomparisonlacksrobustness,asnon-mortgagedefaultratesforjustNovaScotiawerenotavailable.Paydayloandefaultratesfromotherprovinceswerenotavailableeither.
8.19%7.14% 6.83% 7.08%
7.79%
2.71% 2.66% 2.72% 2.63% 2.64%0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
2010-2011 2011-2012 2012-2013 2013-2014 2015-2016
NovaScotiaPaydayDefaultRatev.NationalNon-MortgageDefaultRate
NovaScotiaPaydayDefaultRate
NationalDefaultRate(non-mortgage)
17
percentageallowances.Unfortunatelythisquestioncannotbeansweredatthetime
ofthispaperasthisdataisnotcollectedatanationallevel.NovaScotiaistheonly
province,whichmandatesthecollectionofthisdata.
Payday lending operations are traditionally not managed within the
community in which they are operating. Most owners and managers of payday
lendingoperations tend to live outsideof the area inwhich theyoperate (Kurban
2014).Thisleadstoanotherconcernofcapitalflightwhereincomeisshiftedoutof
theprovinceorcountry,whichcreatesadditionalnegative impact for theprovince
and community. InNova Scotia in 2015, the estimated amount of fees on granted
payday loans was approximately $20.68 million dollars. If these loans were not
madewithinNova Scotia it is possible that these fundswould have been spent in
some other fashion locally and resulted in more economic stimulus within the
province.
18
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3.Legislation
Previous to 2006, payday loans were mainly unregulated and had no
legislation that specifically stipulated interest rate restrictions or to whom
operations could lend. As stated previously payday loans are a variation of a
practice called “salary buying” where individuals with irregular income could
purchasefuturesalarypaymentsatadiscountedrate.Theseservicesstartedinitially
toserveasanalternativetobankswhowouldnotoffersmallloansforshortperiods
oftime.
However,salary-buyingoperationsquicklybecameapopularlendingoption
of criminal organizations and loan sharks. In the years of the Great Depression
almost all of the salary-buying practices were offered through loan sharks and
criminalorganization(Talai2014).
Theconcernsofsalary-buyingoperationsweresimilartothoseexistingtoday
withpaydayloans,inthatitiseasyforborrowerstoenterintoacycleofdebtthatis
extremelydifficulttoexit,andthatthecostofservicingthedebtobtained,outweighs
theactualloanborrowed.
Thepressuretoimplementusurylawswasmoreheavilyweightedontherisk
ofphysicalharmthatborrowershadfromlackofpayment.Ifaborrowercouldnot
payat the time inwhich the loanwasdue, thecriminaloperationwould threaten,
harm or even kill the delinquent borrowers. The act of salary-buying and loan
sharkingdidnotbecomeillegal inCanadauntil the1970’s(GovernmentofCanada
Department of Justice 2015). This criminal offensewas implemented through the
20
usury laws indicating amaximum lending rate of 60%. This continued as the law
untiltheCriminalCodeofCanadawasamendedin1989toincludeS347whereitis
acriminaloffensetoenterintoanagreementorarrangementtoreceiveinterestata
criminalrate,aswellasacriminaloffensetoreceivepaymentorpartialpaymentof
interestatacriminalrate(Antle1994).
Theprocessofchequecashingstartedtobecomepopularinthe1980’sasa
wayaroundtheseusurylaws.Theprocessofchequecashingwasaservicewherea
customerwould present a post-dated cheque and an organizationwould cash the
cheque immediately for a fee. Thiswas seen as a different typeof operation from
salary-buyingorloansharkingasthetermswerenotdiscussedininterestbutrather
inadministrativefees.
In the early 1990’s, this process transformed into payday lending services,
where borrowers would present employment records, to gain access to a future
paycheque immediately, for the cost of an administrative fee. This remained the
processofpaydaylendinguntilitgainedextremepopularityintheearly2000’s.The
federalgovernmentwascalledupontoamendtheCriminalCodetoincludepayday-
lendingoperationsintotheexistingusurylaws.
In 2006, the federal government introducedBill C-26, anAct to amend the
Criminal Code. The Bill defined a payday loan as “An advancement of money in
exchange forapost-datedcheque,apre-authorizeddebitora futurepaymentofa
similarnaturebutnot foranyguarantee,suretyship(formof insurance),overdraft
protection,orsecurityonpropertyandnotthroughamarginloan,pawnbroking,a
lineofcreditorcreditcard.”Thegovernmentset limitationson thedollaramount
21
restrictionsaswellastimehorizonsofthepaydaylendingoperations,specificallya
limitof$1,500perloanatamaximumtimeof62days.
The legislation also explicitly allowed each province the autonomy to
implement personalized regulation as they saw fit. TheBillmade no indication of
limitations of interest on the loans or enforcement of the 60% annual rate as
mentioned from previous sections of the law. Inmy opinion the Billwas left in a
stateofambiguitythatmakesitdifficulttoestablishfirmrestrictionsforthepayday
lendingoperationswithinCanada.
There is an easy interpretation that prevents current financial institutions
fromenteringthismarket,astheywouldbesubjectedtothe60%annualrate,while
non-depositoryinstitutionscouldavoidsuchregulation.Additionally,nomentionof
continuous or over-borrowing restrictions existed within the legislation, which
allowsborrowerstheopportunitytoenterintoaworrisomecycleofdebt.
In2007,bothManitobaandSaskatchewan implemented the firstprovincial
legislationregardingpayday-lendingoperationswithintheirprovinces.Thefocusof
their legislationwas centered on education, and creating a time frame towhich a
borrowercouldexittheloanwithoutpenaltyorbeingchargedafee.
In Saskatchewan, restrictions were placed on continuous borrowing,
preventingborrowers fromentering into a roll-over loan immediately.A roll-over
loan was defined as “…the extension or renewal of a payday loan that imposes
additional amounts, fees, rates, penalties or other charges on the borrower, other
thantheinterestmentionedinclause14.2.a,andincludesanadvancementundera
newpaydayloanagreementtopayoutanexistingpaydayloan.”Instead,borrowers
22
had towait one business day from the time of payment of the preceding loan, in
ordertoapplyforanother.
No restrictions were initially placed on interest rates or the proportion of
their incometheywereallowed toborrow.Thisopenedupborrowers to issuesof
over-borrowingandpunitiveinterestrates.Itwasnotuntil2012thatrestrictionson
interestandborrowingpercentageswereimplemented.Saskatchewanimplemented
aninterestratecapof$23per$100borrowedandproportionrestrictionsof50%of
theborrowersnetpay.
Alargerconcernisalsoraisedwiththerestrictionsofinformationrequiredto
gainaccesstoapaydayloaninSaskatchewan;lendersarenotallowedtorunacredit
checkontheborrowertoapproveordenytheloan;aswellastheyarenotallowed
toviewbanking informationof theborrowerother than tosetupapreauthorized
payment.Therestrictionsofthisclauseunderminetheabilityforthepaydaylender
toobserveifacoincidingloanisinexistencefortheborrowerandallowsborrowers
toengageinmultiplepaydayloansatthesametime.
Manitobafocusedonimplementingboth interestraterestrictionsaswellas
proportionofincomerestrictionsin2007.Theysettheinterestratecapat$17per
$100borrowedandthepercentageofincomecouldnotbegreaterthan30%ofthe
borrower’snetpay.However,theyallowedforrolloverloanstobeavailableintheir
province,settingacapatanadditional5%or$22per$100borrowed.Restrictions
on information gathering of borrowers were also existent within the legislation,
however, more in the way of preventing credit checks to be done. Lenders were
allowedtoseebankstatementsinordertomitigatesimultaneousborrowing.Inmy
23
opinion,thelegislationofthisProvinceisalsoambiguous.Therearenomentioned
penaltiesifthelenderallowsforsimultaneousborrowingunlesstheyareattempting
totakeoutmultipleloansfromthesamelender.
Fromtheeducationstandard,bothprovincesmandatedspecificinformation
beincludedineachloanapplication,highlightingtheannualpercentagerateofthe
loan (APR) as well information regarding effective budgeting and a warning that
paydayloansarehighinterestloans.Therearepagesoflegislationhighlightingthe
sizeandrequirementsofsignsindicatingthesewarningsfromplacementwithinthe
storeandonline,torequiringinitialsandsignaturesonapplicationshighlightingan
understandingoftheattachedinterestrate.Theseeducationrequirementswerethe
mostconsistentacrossallprovinces.
OntarioandNewBrunswickwerethenextprovincestoofferregulationand
legislationofpaydaylending.AsseeninManitobaandSaskatchewan,thefocusagain
wasoneducationandforcedmarketingofinterestratestandards.BothOntarioand
NewBrunswickimplementedaninterestraterestrictionof$21per$100borrowed,
but New Brunswick indicated that the rates can be changed, and would be
monitoredbytheUtilityandReviewboard.Bothprovincesrestrictedrolloverloans
frombeingavailable,andset“cooloff”periodsbetween loans(1-2businessdays).
Ontarioalsosetanallowanceof2businessdaystocanceltheloanwithoutpenalty
orarequirementtogivereasoningforcancellation.
NovaScotia,BritishColumbiaandAlbertaimplementedregulationsin2009,
but Nova Scotia has been the most active province in continuously updating and
amending payday-lending regulation. Nova Scotia set a mandate within their
24
regulation that utility and review board was to meet every 2-4 years to review
payday-lending operations and make changes as needed, without requiring bill
proposals and amendments to provincial legislation. Nova Scotia has used this
mandatetomodify interestrates imposedonpaydaylendingoperationsaswellas
make changes as themarket has changed. In 2009 interest rates on payday loans
werecappedat$31per$100borrowed,butchangedto$25per$100borrowedin
2011,and$22per$100borrowedin2015.Additionally, in2011NovaScotiaused
thismandate toallow them to implementadditional restrictionsononlinepayday
lendingoperations, requiring themtoregister forapermitofoperationwithin the
provinceinordertooperatelegally.
Nova Scotia is also the only province currently to require payday-lending
operations to send data regarding their loans to the provincial government for
furtheranalysis.Thedata-sharingrequirementisasfollows:“Totalvalueofpayday
loansprovidedinNovaScotia,thenumberofpaydayloanagreementsenteredinto,
thenumberofrepeatloanagreementsenteredinto,theaveragesizeandtermlength
ofpaydayloans,andthetotalvalueofpaydayloansthathavegoneintodefaultand
havebeenwrittenoff.”However,NovaScotia is still lacking legislationonrollover
loansaswellasproportionallendingrestrictions.
BritishColumbiahasamaximuminterestrateof$23per$100borrowedand
has a restrictiononproportionof incomeof 50%of net pay.However, oneof the
largest differentiating factors forBritishColumbia is the allowance for continuous
borrowers an opportunity to pay back the third subsequent loan over three pay
periods(iftheyarepaidbi-weekly,semimonthly,oramorefrequentbasis)ortwo
25
payperiods (if theyarepaidmonthlyor less frequently).This restrictioncouldbe
extremelyhelpfulineliminatingthemajorissueofcontinuouslending.
Prince Edward Island is themost recent province to implement legislation
and regulation of payday loans. PEI implemented restrictions in 2015. Prince
Edward Island has a similar broad approach tomany of the other provinces. The
include educational requirements for lending operation and specify sign size and
marketing requirements for ensuring the APR is posted effectively, as well as
restrictionsonroll-overloansandcoolingoffperiods.Theirinterestraterestriction
iscappedat$25per$100borrowed.
Manyprovinceshaveupdatedregulationssincetheirinitialimplementation.
Specifically in 2009 and again in 2011, most provinces included some form of
additional regulation for online payday lending operations. Alberta has been the
most recent province to implement additional payday-lending regulation. In 2016
they updated regulations, taking into consideration all other provincial legislation
that has previously been implemented. The biggest change in the most recent
legislationisthemandatethatpayday-lendingdatabetrackedandsharedwiththe
provinceforfurtheranalysis.Theyhaveimplementedthestrictestinterestratecap
of$15per$100borrowed(previously$23per$100borrowed).Theyhaveexplicitly
restricted roll-over loans, but allow for continuous borrowing after a mandated
coolingoffperiod.However, theyhave implementedan interestrestrictionof60%
annuallyonall loans,whicheffectivelycapsthenumberofcontinuous loansthata
borrower can engage in. They have also mandated education requirements to
providinginformationtoborrowers.
26
QuebecandNewfoundlandaretheonlyremainingprovincesthatdonothave
paydaylendingregulationorlegislation,butforoppositereasons.Quebecdoesnot
have payday lending regulations because they have stricter provincial usury laws
that cap any loan interest at 35% annually. This effectively eliminates payday-
lending operations within Quebec. However, Quebec still has payday lending
operations locatedwithin theprovince,but theyare locatedon thebordersof the
provinceandcanonlylendtoQuebecresidentsoutsideoftheprovince.
Newfoundland has simply not implemented any form of regulation of
payday loans and allows the federal restrictions to guide operations within the
province.Themostlikelybenefitforalackofoverwhelmingpaydayusagewithinthe
province is the sprawl across the province. Almost half of the residents of
NewfoundlanddonotliveinthelargerareasofCornerBrookandSt.John’s,which
meansthatthemarketsinthoseareasarelikelytheonlyareasofinterestforpayday
lendingoperations. TheeffectivemarketrateofinterestforNewfoundlandpayday
lendingoperationsis$25per$100borrowed.(Basedonpersonallycollecteddata)
27
4.MethodologyandResults
4.1DataandMethodology
I utilized information from two separate household surveys to analyze the
effects of government legislation on payday loans.5The first survey usedwas the
Survey for Financial Security, (SFS), which was conducted in three waves by
Statistics Canada. Only the data sets from 2005 and 2012 were used in the
specification,asthesurveydidnotmeasurepaydayloans inthe1999dataset.The
intentionoftheSFSwas“…tocollectinformationfromasampleofCanadianfamilies
on their assets, debts, employment, income and education. This helps in
understanding how families’ finances change because of economic pressures.” In
total there were 12,003 observations in the survey data during these collection
periods.Thesurveywasdesignedforcrosssectionalsamplingofthedataandwas
conductedviatelephone.Thissurveypassestherequirementofrelevancyenoughto
be used within my specifications as it allows for a greater description of the
characteristics of a payday loan borrower and how changes within price caps of
interestratescanaffectindividualswithrelevantcharacteristics.
ThesecondsurveyusedwastheCanadianFinancialCapabilitySurvey,which
wasconductedin2008andagainin2014.ItwasconductedbyStatisticsCanada,and
5Twoothersurveyswerealsoconsidered;TheSurveyofConsumerFinances,andtheSurveyofLabourandIncomeDynamics.Bothwerediscountedasunusablerelativetomeasuringpaydayloanimpacts.TheSurveyofConsumerFinancesendeditscollectionin1999andhadnomentionofpaydaylendingorcashadvanceusage.TheSurveyofLabourandIncomeDynamicswasfocusedonemploymentstatisticsanddidnottouchondebtoraccesstocreditinanymanner
28
wasintended“…tocollectinformationthatwillilluminatethedegreeofknowledge
that Canadians have concerning financial decision-making. In other words, how
Canadians understand their financial situation, the financial services available to
them and their plans for the future.” The survey had a combined 22,204
observationsduringthecollectionperiods.Thesurveywasconductedviatelephone
andwasdesignedforcrosssectionalsamplingofthedata. Thissurveyalsopasses
the requirement of relevancy as declaring bankruptcy can be considered a weak
welfaremeasurement and the independent variables used allow for a reasonable
discussionofeffectsofbankruptcyrates.
29
4.2IssueswithDataAvailability
Itcanbedifficulttoempiricallyquantifytheeffectsofpaydaylendingwithin
Canada. Data that is relevant and useful can be scarce and various endogeneity
concerns cannotbe addressed completely,meaning that unobservedvariables can
change thedynamicof any specificationandmake itdifficult to establisha robust
relationship between the independent and dependent variables. One example of
suchanendogeneityproblemisreasoningforusingapaydayloan.Thisvariable is
unobserved but can dramatically change the dynamic of any specification used to
measuretheimpactsofpaydayloans.
A large impediment to analyzing the effects of government legislation on
payday lending is the lackof information collected to assessborrowingusageand
intent.As statedpreviously,NovaScotia is currently theonlyprovince that tracks
payday lending operations within the province, but the data is not sufficient to
determine if the payday loan is used to satisfy the borrowers’ time discount
preference,or if theborrowersare forced into thismarketdue toa lackofproper
substitutes,andwouldotherwisebehaverationally.
My intention to cleanly identify the effects of government legislation of
paydaylendingonthewelfareofborrowerswithinthismarketisimpededbyalack
ofinformationonborrowing.Borrowingintentionscanbedifficulttoquantifyeven
if observed because the data itself may be biased by self-reporting problems.
Instead measurements of welfare would be a reasonable substitute under the
assumptionofrationalborrowers.Ifasurveywasconductedthataskedrespondents
30
if theywerewithout basicwelfare needs andwhether payday loanswereused to
satisfy these requirements, itwould create amore robust picture of the effects of
payday loans onborrowers.Additionally, questions related to spending intentions
couldbe tracked inorder toestablish timepreferencesofborrowers.Forexample
askingwhy a borrower is looking to use a payday loan. The combinationof these
variableswouldallowfurtheranalysisofpaydayloansandtheirbenefits.
31
4.3VariableSelectionofFirstSpecification
Inmyfirstspecification,IusetheSurveyforFinancialSecurityinanattempt
toanalyzethetypeofborrowerthatwouldengageinpaydaylendingactivities.The
surveyincludesmorequestionsrelatingtothepersonalcharacteristicsandincome
dynamicsthanarepresentedintheCanadianFinancialCapabilitySurvey.However,
therearenowelfaremeasureswithintheSFSthatwouldallowforitsindependent
analysisasthemainspecification.Insteadthepurposeofthisspecificationistosee
why a consumer might choose to enter into the payday loans market. I look to
combinetheresultsofthisspecificationwithmysecondspecificationtotellamore
dynamicstoryofborrowerswithinthepaydayloansmarket.
Thedependentvariableofthisspecificationisabinaryvariablethattakesthe
valueof1ifarespondentusedapaydayloaninthepastthreeyearsand0otherwise.
Selection of independent variables was based on three distinct characteristic
categoriesandeachvariable’sinclusionisexplainedinTable1.First,categoriesthat
assisted in the determination of personal attributes were selected such as age,
education,totalnon-mortgagedebt,6andmainsourceofincome.Secondly,variables
that illustrated financial challenges of potential borrowerswere included, such as
number of credit cards the respondent has, whether they pay their credit card
balanceattheendofeverymonth,whethertheyhaveanRRSPsavingsvehicle,and
6Theinclusionoftotalnon-mortgagedebtwasusedasasubstituteforincome,astheyarehighlycorrelated.Onaverage,youcannotobtainhigherlevelsofdebtwithouthigherlevelsofincome.After-Taxincomewasconsidered,butwasdeterminedtobestatisticallyinsignificant.
32
whethertheyhaveamonthlybudget.Finally,variablesrelatedtodirectdecisionsof
useofapaydayloanareconsideredsuchas:whethertherespondentbeenrefuseda
creditcard,andtheinterestratecapoftheloanintheirprovince.
33
Table1:VariableSelectionReasoning(1stSpecification)
Variable ExplanationforInclusioninModel
AgeofMajorIncomeEarner
Agewasincludedinthespecificationasacontrolfor
individualsfacingdifferentfinancialissuesatdifferentpoints
inthelifecycle.Itisacontinuousvariablethatcanonlybe
positive.
NumberofCreditCards
Thenumberofcreditcardswasincludedasitindicates
individualswithmultiplealternativeformsofcreditto
paydayloans.Ifeconomicexpectationshold,thenindividuals
withmorealternativesforcreditwillbelesslikelyusepayday
loans.Itisacontinuousvariablethatcanhaveanyvalue
including0
EducationLevel
Educationwasincludedtohelpestablishthepersonal
characteristicsofthepotentialborrowerbutalsocanactasa
proxyforfinancialliteracy.Individualswhoaremore
educatedtendtohavebetterfinancialliteracyonaverage.It
measureseducationinyearsandisacontinuousvariable.
34
PaysCreditCardBalanceEach
Month
Payingcreditcardbalancesoffeachmonthwasincludedasit
controlsforincomeeffectsofcreditaccess.Itisadummy
variablewherethebasegroupisthataborrowerdoesnot
payofftheircreditcardbalanceeachmonth.
HasBeenRefusedaCredit
Card
Havingbeenrefusedacreditcardwasincludedtoidentify
individualswhoarewithoutasubstitutetopaydayloans.Itis
adummyvariablewherethebasegrouphasnotbeen
refusedacreditcard.
HasanRRSP
HavinganRRSPwasincludedasitisexpectedthatindividuals
whocanaffordtohaveanRRSPlikelyareofahigherincome
orengageinsomeformofrationalsavings,whichmay
preventpaydayloanusage.Itisadummyvariablewherethe
basegroupdoesnothaveanRRSP
MaintainsaRegularMonthly
Budget
Maintainsaregularmonthlybudgetwasincludedasa
variablethatprovidesinsightintothesavingshabitsof
potentialborrowers.Borrowerswhomaintainaregular
monthlybudgetmaybeforcedintothepaydayloansmarket
duetostructuralfinancialproblemsratherthanmyopic
consumptionhabitsthatcausethemtobemorerisky.Itisa
dummyvariablewherethebasegroupdoesnotmaintaina
regularmonthlybudget
35
TotalNon-MortgageDebt
Totalnon-mortgagedebtwasincludedbothasaproxyfor
incomeasincreasesindebtarehighlycorrelatedwith
increasesinincome.Butalsoasanindicatoroflimited
alternativeformsofcredittopaydayloans.Itisacontinuous
variablethatcanhaveanypositivevalue.
TotalNon-MortgageDebt
Squared
Includingaquadraticfunctionoftotalnon-mortgagedebt
wasincludedasitestablishesthelinearnatureofpayday
loanusageamongdifferentincomegroups.Itisacontinuous
variable.
MainSourceofIncome:
GovernmentTransfers
Mainsourceofincomeasagovernmenttransferwas
includedtocontrolforusageofpaydayloansamong
extremelylow-incomegroups.Thisgroupcontains
individualswhodonotworkandarenotretired,wheretheir
mainsourceofincomeissomeformofgovernmentsubsidy
ortransferpayment.Itisadummyvariablewherethebase
groupisindividualswhosemainsourceofincomeisnot
obtainedthroughgovernmenttransfers.
InterestRateCap
Theinterestratecapwasincludedtocontrolforprice
restrictionsofpaydayloans.Thisisacontinuousvariablethat
isdeterminedbyprovincialregulation.
36
Alberta
ProvincialDummyVariables.
BCisusedasthebasegroup.Cantakethevalueof0or1
Saskatchewan
Manitoba
Ontario
Quebec
NewBrunswick
NovaScotia
PrinceEdwardIsland
Newfoundland
37
4.4RegressionAnalysisofFirstSpecification
𝑃𝑎𝑦𝑑𝑎𝑦! = 𝛽! + 𝛽!𝐴𝑔𝑒! + 𝛽!𝐴𝑔𝑒!! + 𝛽!𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓𝐶𝐶𝑠! + 𝛽!𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛!
+ 𝛽!𝑃𝑎𝑦𝑠𝐶𝐶𝐵𝑎𝑙𝑎𝑛𝑐𝑒! + 𝛽!𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶! + 𝛽!𝐻𝑎𝑠𝑅𝑅𝑆𝑃!
+ 𝛽!𝐻𝑎𝑠𝐵𝑢𝑑𝑔𝑒𝑡! + 𝛽!𝑇𝑜𝑡𝑎𝑙𝐷𝑒𝑏𝑡! + 𝛽!"𝑇𝑜𝑡𝑎𝑙𝐷𝑒𝑏𝑡!! + 𝛽!!𝑀𝑆𝐼𝑁𝐶𝐺𝑜𝑣!
+ 𝛽!"𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝐶𝑎𝑝! ∗ 𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶! + 𝛽!"𝑆𝑎𝑠𝑘𝑎𝑡𝑐ℎ𝑒𝑤𝑎𝑛!
+ 𝛽!"𝑀𝑎𝑛𝑖𝑡𝑜𝑏𝑎! + 𝛽!"𝑂𝑛𝑡𝑎𝑟𝑖𝑜! + 𝛽!"𝑄𝑢𝑒𝑏𝑒𝑐! + 𝛽!"𝑃𝐸𝐼!
+ 𝛽!"𝑁𝑜𝑣𝑎𝑆𝑐𝑜𝑡𝑖𝑎! + 𝛽!"𝑁𝑒𝑤𝐵𝑟𝑢𝑛𝑠𝑤𝑖𝑐𝑘! + 𝛽!"𝑁𝑒𝑤𝑓𝑜𝑢𝑛𝑑𝑙𝑎𝑛𝑑! + 𝜀!
I utilized a linear probabilitymodel for this regression, as Iwas looking to
explainthestrengthoftherelationshipbetweentheindependentvariablesandthe
probability that an individual would use a payday loan. 7 The results of this
specificationarepresentedinTable2.Theyindicatethatasinterestratesincrease,
theprobabilitythatsomeonewhohasbeenrefusedacreditcardusesapaydayloan
alsoincreases.Ispeculatethatthisisduetoarelaxingofrestrictionsofthepayday
lendingoperationsrelatedtowhoqualifiesforapaydayloan.Aspermissibleinterest
ratesincreasespaydaylendingoperationsarewillingtolendtoriskerborrowers.
Thisdistinctionincludesbothindividualswithmyopicconsumptionhabitsas
well as individualswith incomesbelow the traditional acceptance rate forpayday
7IusedWhite’scorrectionofstandarderrorstocorrectforheteroscedasticityautomaticallypresentwithintheregression.Iexpectedheteroscedasticitytobepresentas𝑉𝑎𝑟 𝑈! 𝐼𝑛𝑐𝑜𝑚𝑒! ≠ 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡.
38
lendinginstitutions.8Theseresultsindicatethatcreditrationingtakesplacewithin
thepaydaylendingmarket.Thoughthepotentialsupplyforpaydayloans isnearly
infinite, lending institutionswill ration based upon the riskiness of the borrower.
UsingEquation4.19andholdingallothervariablesconstant,atthenationalpayday
loaninterestrateaverageof19%aborrowerwhohasbeenrefusedacreditcardis
12.89%morelikelytouseapaydayloanthansomeonewithanalternativesourceof
credit.WhereasaborrowerwhohasbeenrefusedacreditcardthatlivesinAlberta
withaninterestrateof15%is8.77%morelikelytouseapaydayloanthansomeone
with an alternative source of credit. These results support the credit-rationing
hypothesisfromtheincreasedprobabilityofpaydayloanusagethroughincreasesin
interestrates.
𝑃𝑎𝑦𝑑𝑎𝑦! = 1.0304 ∗ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑎𝑡𝑒𝐶𝑎𝑝! ∗ 𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶𝑎𝑟𝑑! − 0.0669
∗ 𝑅𝑒𝑓𝑢𝑠𝑒𝑑𝐶𝐶𝑎𝑟𝑑!
Equation4.1
Provincialdummyvariablesareincludedwithinthespecificationtoaccount
for regional differences not accounted for by other variables. This can include
legislative differences that are difficult to quantify such as borrowing totals as a
percentageofincome.However,interestraterestrictionsarethehighestcorrelating
variablefordeterminingpaydayloanusageamongprovinces.
8Informationontheseincomelimitswasnotavailableandisbaseduponinternalcreditofferingguidelinesateachpaydayloaninstitution.Theonlylimitationsthatareknownaretheloanamountasapercentageofincomerestrictionimplementedwithinvariousprovinces.Thisrestrictioncouldnotbeeffectivelyappliedtothespecificationtodrawanymeaningfulconclusionabouttheseborrowers.9Equation4.1comesfromtheresultsofthefirstspecification.
39
Table2:CharacteristicsofaPaydayLoanBorrower(1stSpecification)
DependantVariable: BinaryUsageofPaydayLoansin
Past3YearsObservations:12,003
(1)
AgeofMajorIncomeEarner -0.001
(0.0002)
NumberofCreditCards -0.005
(0.002)
EducationLevel -0.005
(0.001)
PaysCreditCardBalanceEachMonth -0.027
(0.004)
HasBeenRefusedaCreditCard -0.067
(0.017)
HasanRRSP -0.0174
(0.004)
MaintainsaRegularMonthlyBudget 0.001
(0.003)
TotalNon-MortgageDebt -8.83E-08
(1.37E-08)
TotalNon-MortgageDebtSquared 4.11E-14
(8.45E-15)
MainSourceofIncome:GovernmentTransfers -0.011
40
(0.005)
InterestRateCap*RefusedCreditCard 1.030
(0.155)
Alberta 0.006
(0.006)
Saskatchewan -0.024
(0.007)
Manitoba 0.001
(0.008)
Ontario -0.005
(0.005)
Quebec -0.027
(0.004)
PrinceEdwardIsland -0.022
(0.010)
NovaScotia -0.018
(0.008)
NewBrunswick -0.028
(0.007)
Newfoundland -0.025
(0.008)
White'sStandardErrorCorrectionApplied Y
Note:This table reportsOLSestimation results fora linearprobabilitymodel regressionofvariouscharacteristicsthatmayeffectaborrowersdecisiontouseapaydayloan.Interestratecapsareusedasanexogenousvariable.Inclusionofcertainvariablesthatarestatisticallyinsignificantisbasedoneconomicvalueassociatedwiththevariable.StandardErrorsareinparentheses.
41
Table 3 outlines the results each independent variable and their impact on
thedependentvariable.
Table3:VariableExplanation(1stSpecification)
AgeofMajorIncomeEarner
Theageofthemajorincomeearnerwasstatisticallysignificant
atthe5%levelofsignificance.Itshowsanegativecorrelation
betweenageandtheprobabilityofpaydayloanusage.Thisis
tobeexpectedasolderindividualslikelyhavesomeformof
accumulationofwealthandtherelianceonpaydaylendingis
less.
NumberofCreditCards
Thenumberofcreditcardsthatanindividualhasisnegatively
correlatedwithpaydayloanusageandisstatisticallysignificant
atthe5%levelofsignificance.Thisvariableishighlycorrelated
withincomeasindividualswithmoreincome,traditionallyhave
morealternativesofcreditavailabletothem.Withmore
alternativesofcreditavailable,therelianceonthepaydayloans
marketreasonablywouldshrink,whichisrepresentedinthe
results.
42
EducationLevel
Educationleveloftherespondentwasfoundtobenegatively
correlatedandstatisticallysignificantatthe5%levelof
significance.Thisvariableiseconomicallyimportantaswecan
assumethatindividualswithhigherlevelsofeducationwould
alsoshowhigherlevelsoffinancialliteracyonaverage.This
wouldindicatethathighereducatedindividualswouldnot
enterthepaydayloansmarketduetotheextremelyhighfees
attachedtotheloans.
PaysCreditCardBalanceEach
Month
Payingcreditcardbalancesoffeachmonthwasnegatively
correlatedandstatisticallysignificantatthe5%levelof
significance.Thisvariableishighlycorrelatedwithincomeas
individualswithhigherlevelsofincomecanaffordtopayoff
thebalanceeachmonth.Thisvariableisstillimportant
economicallyasitcanindicateadesireofborrowerstonot
holdontodebtforlongerthantheyneedto.
HasBeenRefusedaCredit
Card
Havingbeenrefusedacreditcardiscorrelatedwiththe
probabilityofusingapaydayloanandisstatisticallysignificant
atthe5%levelofsignificance.Thisvariableshowsanegative
correlationduetotheinvolvementofaninteractiontermwith
interestrates.
43
HasanRRSP
HavinganRRSPsavingsvehicleisnegativelycorrelatedwiththe
probabilityofusingapaydayloanandisstatisticallysignificant
atthe5%levelofsignificance.Thisvariableindicatesthat
individualswhomaintainaRRSParelikelyabletoafford
personalfinancialshocksthroughtheirsavingdecisions.Aswell
itislikelythatindividualswithhigherlevelsofincomearemore
likelytohaveaRRSPsothisvariabledoeshaveacorrelationto
incomeaswell.
MaintainsaRegularMonthly
Budget
Maintainingaregularmonthlybudgetispositivelycorrelated
withpaydayloanusagebutisstatisticallyinsignificantatall
levelsofsignificance.Thisindicateseconomicallythat
individualstowhichmaintainabudgetaboveacertainincome
thresholdarenotlikelytouseapaydayloanastheyalsolikely
havealternativeformsofcredit.Aswellindividualsbelowa
certainthresholdthatmaintainamonthlybudgetsimply
cannotaffordtocoverpersonalfinancialshocksastheylikely
donothavealternativeformsofcreditandthusareforcedinto
thepaydayloansmarketthroughdesperation.
44
TotalNon-MortgageDebt
Totalnon-mortgagedebtisnegativelycorrelatedand
statisticallysignificantatthe5%levelofsignificance.However,
theimpactisincrediblysmall,indicatingthatlargeswingsin
consumerdebtwouldberequiredtoittoaffectaborrowers
decisiontouseapaydayloanservice.Thedebtvariableisalso
highlycorrelatedwithincomeandthereforetakesaquadratic
distributionshape.
TotalNon-MortgageDebt
Squared
Thequadraticfunctionoftotalnon-mortgagedebtispositively
correlatedandstatisticallysignificantatthe5%levelof
significance.Thisvariableisinlinewitheconomicexpectations,
asindividualswithaccesstoalternativeformsofcreditwilluse
thoseuntiltheyhavebeenmaxedout.Oncetheyhavebeen
maxedoutweseetheprobabilityofusingapaydayloan
increase.However,thisisonlyrepresentativeofindividuals
withincertainincomegroupsashigherincomegroupshavea
significantlylowerprobabilityofusingapaydayloan,whereas
incomegroupsofextremelypoorindividualscannotget
approvedforanycreditincludingpaydayloans.
45
MainSourceofIncome:
GovernmentTransfers
Anindividualwhosemainsourceofincomeisthrough
Governmenttransfersisnegativelycorrelatedandstatistically
significantatthe5%levelofsignificance.Thisisanindication
thatindividualswhosemainsourceofincomeisthrough
governmenttransfersdonotmeettheincomerequirementsto
qualifyforpaydayloansonaverage.
InterestRateCap*Refused
CreditCard
Theinteractiontermofinterestratecapandrefusedcredit
cardispositivelycorrelatedwithpaydayloanusageandis
statisticallysignificantatthe5%levelofsignificance.Thisis
likelyanindicationthatastheinterestratesincrease,the
supplyofcreditavailablealsoincreasesasthepaydaylending
institutionsaremorelikelytolendtoindividualswithhigher
creditriskprofiles.
Alberta
Albertaispositivelycorrelatedwithpaydayloanusagebutis
statisticallyinsignificantatalllevelsofsignificance.This
indicatesthatprovincialdifferencesbetweenBritishColumbia
andAlbertaarenotsignificantforpaydayloanusage.
Saskatchewan
Saskatchewanisnegativelycorrelatedwithpaydayloanusage
andisstatisticallysignificantatthe5%levelofsignificance.This
indicatesthatresidentsofSaskatchewanarelesslikelytousea
paydayloanthanaresidentofBritishColumbia.
46
Manitoba
Manitobaispositivelycorrelatedwithpaydayloanusagebutis
statisticallyinsignificantatalllevelsofsignificance.This
indicatesthatprovincialdifferencesbetweenBritishColumbia
andManitobaarenotsignificantforpaydayloanusage.
Ontario
Ontarioisnegativelycorrelatedwithpaydayloanusagebutis
statisticallyinsignificantatalllevelsofsignificance.This
indicatesthatprovincialdifferencesbetweenBritishColumbia
andOntarioarenotsignificantforpaydayloanusage.
Quebec
Quebecisnegativelycorrelatedwithpaydayloanusageandis
statisticallysignificantatthe5%levelofsignificance.This
indicatesthatresidentsofQuebecaresignificantlylesslikelyto
useapaydayloanthanBritishColumbia.
NewBrunswick
NewBrunswickisnegativelycorrelatedwithpaydayloanusage
andisstatisticallysignificantatthe5%levelofsignificance.This
indicatesthatresidentsofNewBrunswickarelesslikelytouse
apaydayloanservicethanresidentsofBritishColumbia.
NovaScotia
NovaScotiaisnegativelycorrelatedwithpaydayloanusageand
isstatisticallysignificantatthe5%levelofsignificance.This
indicatesthatresidentsofNovaScotiaarelesslikelytousea
paydayloanservicethanresidentsofBritishColumbia.
47
PrinceEdwardIsland
PrinceEdwardIslandisnegativelycorrelatedwithpaydayloan
usageandisstatisticallysignificantatthe5%levelof
significance.ThisindicatesthatresidentsofPrinceEdward
Islandarelesslikelytouseapaydayloanservicethanresidents
ofBritishColumbia.
Newfoundland
Newfoundlandisnegativelycorrelatedwithpaydayloanusage
andisstatisticallysignificantatthe5%levelofsignificance.This
indicatesthatresidentsofNewfoundlandarelesslikelytouse
paydayloansthanresidentsofBritishColumbia.
48
49
4.5VariableSelectionoftheSecondSpecification
Inmysecondspecification,IusetheCanadianFinancialCapabilitysurveyin
an attempt to analyze the probability of declaring bankruptcy for payday loan
borrowers. The dependent variable of this regression was a binary variable that
takesthevalueof1iftherespondenthaseverdeclaredbankruptcyotherwise0.
Iusedindependentexplanatoryvariablesthatfellintothreecategories.First,
I selected variables of personal attributes such as age brackets and education
dummy variables. These variables were important in isolating the impact caused
through financial literacy and changes in spending and savings habits through
differentagecategories.Second,Iselectedvariablesoffinancialchallenges,suchas
whether the respondent had difficulty maintaining a monthly budget, or if the
respondent had one or more bills to which they had a late fee, and whether the
respondenthadaccesstoacreditcard.Thesevariableswereimportantinisolating
other causes of potential bankruptcy available within the specification. Finally, I
selectedvariablesthatpertainedtopaydayloanusagesuchasiftherespondenthad
usedapayday loanonce inthepast threeyearsor if theyhadengagedinmultiple
payday loans. Additionally, I added population weighted interest rate caps as an
exogenousvariable indicatingpoliticaldiscontinuitiesbetweenprovinces.Meaning
thatinterestratescanactasanimposedpricerestrictionthatcandetermineifusage
ofpayday loanatdifferentratesof interest impacts theprobabilityofahousehold
declaring bankruptcy. The interest rate caps are weighted due to the data set
includingregionspecificdataandnotprovincial,thisweakenstherobustnessofthe
50
specificationbutnot enough toprevent itsusage.Eachvariable is explained in its
inclusionwithinthespecificationwithinTable4.
Table4:IndependentVariableSelectionReasoning(2ndSpecification)
AnnualincomeIsbetween32kand
55k(INC32to55)
Annualincomebracketswereincludedinthe
specificationasacontrolforimpactsondifferent
incomelevels.Individualsineachbracketmayface
completelydifferentfinancialshocksthatwoulddrive
themtodeclarebankruptcy.Eachvariableisadummy
variablethattakesthevalueof1whenapplicable
otherwise0.Thebasegroupisincomebelow$32,000
annually.
AnnualIncomeisbetween56kand
80k(INC56to80)
AnnualIncomeisbetween80kand
119k(INC81to119)
AnnualIncomeisabove120k
(INC120up)
Agebetween25and34
(AGE25to34)
Agebracketswereincludedinthespecificationasa
controlforindividualsfacingdifferencefinancialissues
atdifferentpointsinthelifecycle.Eachbracketisa
dummyvariablethattakesthevalueof1when
applicableotherwise0.Thebasegroupisindividuals
betweentheageof18and24.
Agebetween35and44
(AGE35to44)
Agebetween45and54
(AGE45to54)
Agebetween55and59
(AGE55to59)
Agebetween60and64
(AGE60to64)
Agebetween65and69
(AGE65to69)
Ageabove70(AGE70up)
51
HasCollegeDiploma(COLLEGE)
Educationlevelbracketswereincludedtohelpestablish
thepersonalcharacteristicsofindividualsbutalsoactas
aproxyforfinancialliteracy.Individualswhoaremore
educatedtendtohavebetterfinancialliteracyon
average.Eachvariableisadummyvariablethattakes
thevalueof1whenapplicableotherwise0.Thebase
groupisindividualswithlessthanacollegediploma
(Includingsomecollege,completionofhighschooland
somehighschool)Basegroupvariableswerealso
testedindividuallybutwerefoundtobetoohighly
correlatedwitheachother,hencewhytheywere
includedintoonegroup.
HasUniversityDegree(UNIDeg)
HasGraduateDegree(Grad)
HasaCreditCard(CCard)
HasaCreditCardwasincludedintothespecificationto
indicatealternativeformsofcreditaccessforthe
borrowerItisadummyvariablethattakesthevalueof
1ifapplicableotherwise0.
HasStruggledToMaintainaBudget
(BUDSTRG)
HasStruggledToMaintainaBudgetwasincludedto
controlforindividualswhomayhavestructuralfinancial
issuesormyopictimepreferences.Itisadummy
variablethattakesthevalueof1ifapplicableotherwise
0.
52
HasaLateFeeonOneBill
(LateFee1)
HasaLateFeeonOneBillwasincludedtocontrolfor
individualswhomayhavefinancialbudgetingissues
anddifficultiespayingallbills.Itisadummyvariable
thattakesthevalue1ifapplicableotherwise0.
HasaLateFeeonMorethanOne
Bill(LateFee2)
HasaLateFeeonMorethanOneBillwasincludedto
controlforindividualswhomayhaveseriousissueswith
payingallbillsandcanaccountforpossiblemyopictime
preferences.Itisadummyvariablethattakesthevalue
1ifapplicableotherwise0.
TotalDebtLessthan50k
(DEBTLESS50) Totaldebtbracketswereincludedasanindicatorof
limitedalternativeformsofcredittopaydayloans.As
debtamountsincreaseitwouldbeexpectedthat
borrowersmaystrugglewiththeincreaseddebtservice
burdensandturntoalternativeformsofcreditandbe
morelikelytodeclarebankruptcy.Eachvariableis
binaryandtakesthevalue1ifapplicableotherwise0.
TotalDebtbetween50kand99k
(DEBT50to99)
TotalDebtbetween100kand149k
(DEBT100to149)
TotalDebtbetween150kand199k
(DEBT150to199)
TotalDebtbetween200kand249k
(DEBT200to249)
TotalDebtabove250k(DEBT250up)
HasusedaPaydayLoanserviceonce
inthepast12months(Payday1)
HasusedaPaydayLoanserviceonceinthepast12
monthswasincludedtoindicatethecorrelation
betweenpaydayloansandbankruptcyprobabilities.It
isadummyvariablethattakesthevalueof1if
applicableotherwise0.
53
HasUsedaPaydayLoanService
morethanonceinthePast12
months(ReppDay)
HasUsedaPaydayLoanServicemorethanonceinthe
Past12monthswasincludedasanindicatorofthe
possiblecorrelationbetweencontinuousborrowingand
theprobabilityofbankruptcy.Itisadummyvariable
thattakesthevalueof1ifapplicableotherwise0.
Log(PopulationWeightedInterest
RateCaps)(Log(WLEGCAP))
LogofPopulationWeightedInterestRateCapswas
includedasapricevariableofpaydayloans.Alog
functionwasusedtocapturethenon-linear
relationshipbetweeninterestratesandpaydayloan
usage,asborrowersatthemarginsarelesslikelytouse
apaydayloanatahigherprice.Itispopulation
weighted,asthedatasamplewasnotsortedby
province,ratherbyregion.Itisacontinuousvariable.
54
55
4.6RegressionAnalysisoftheSecondSpecification
𝐵𝑎𝑛𝑘𝑟𝑢𝑝𝑡𝑐𝑦! = 𝛽! + 𝛽!𝐼𝑁𝐶32𝑇𝑂55! + 𝛽!𝐼𝑁𝐶56𝑇𝑂80! + 𝛽!𝐼𝑁𝐶81𝑇𝑂119!
+ 𝛽!𝐼𝑁𝐶120𝑈𝑃! + 𝛽!𝐴𝐺𝐸25𝑡𝑜34! + 𝛽!𝑈𝐴𝐺𝐸35𝑡𝑜44! + 𝛽!𝐴𝐺𝐸45𝑡𝑜54!
+ 𝛽!𝐴𝐺𝐸55𝑡𝑜59! + 𝛽!𝐴𝐺𝐸60𝑡𝑜64! + 𝛽!𝐴𝐺𝐸65𝑡𝑜69! + 𝛽!"𝐴𝐺𝐸70𝑈𝑃!
+ 𝛽!!𝐶𝑜𝑙𝑙𝑒𝑔𝑒! + 𝛽!"𝑈𝑛𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦! + 𝛽!"𝐺𝑟𝑎𝑑𝑢𝑎𝑡𝑒𝐷𝑒𝑔! + 𝛽!"𝐶𝐶𝑎𝑟𝑑!
+ 𝛽!"𝐵𝑢𝑑𝑠𝑡𝑟𝑔! + 𝛽!"𝐿𝑎𝑡𝑒𝑓𝑒𝑒1! + 𝛽!"𝐿𝑎𝑡𝑒𝑓𝑒𝑒2! + 𝛽!"𝐷𝑒𝑏𝑡𝑙𝑒𝑠𝑠50!
+ 𝛽!"𝐷𝑒𝑏𝑡50𝑡𝑜99! + 𝛽!"𝐷𝑒𝑏𝑡100𝑡𝑜149! + 𝛽!"𝐷𝑒𝑏𝑡150𝑡𝑜199!
+ 𝛽!!𝐷𝑒𝑏𝑡200𝑡𝑜249! + 𝛽!"𝐷𝑒𝑏𝑡250𝑢𝑝! + 𝛽!"𝑃𝑎𝑦𝑑𝑎𝑦1!
+ 𝛽!"𝑅𝑒𝑝𝑝𝑑𝑎𝑦! + 𝛽!"𝐿𝑜𝑔 𝑊𝐿𝑒𝑔𝐶𝑎𝑝! + 𝜀!
Iutilizeda linearprobabilitymodel for this regression.10The resultsof this
specificationarepresentedinTable5.Theyindicatethatholdingallothervariables
constant, the probability of declaring bankruptcy dramatically increases once a
borrowerusesapayday loan. I speculate that thereare twopartialeffectsatplay,
which can be explained by the results of the specification. First, borrowers at the
margin are deterred from entering the payday loans market when interest rates
increase, as it is more costly to obtain a payday loan with higher interest rates.
Secondly,thesupplyofloansislikelytoincreaseduetotheallowanceofhigherrisk
individuals into the payday loansmarket. This increase of higher risk individuals
likelyinflatestheprobabilityofdeclaringbankruptcyforpaydayloanusers,asthese
10IusedWhite’scorrectionofstandarderrorstocorrectforheteroscedasticityautomaticallypresentwithintheregression.Iexpectedheteroscedasticitytobepresentas𝑉𝑎𝑟 𝑈! 𝐼𝑛𝑐𝑜𝑚𝑒! ≠ 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡.
56
borrowersaremoredesperate.Iattemptedtointeractthesetermstoconfirmthese
speculations, the results were statistically insignificant but the relationship was
positively correlated with bankruptcy rates. Additionally, a lack of other
independent variables availablewithin the surveyprevented the ability to control
for all possible financial characteristics that might strengthen the relationship
betweeninterestratecapsinteractedwithpaydayloanusageandtheprobabilityof
bankruptcy.InsteadIrelyontheresultsofthefirstspecificationtocommentonthe
relationshipsbetweenpayday loanusageandbankruptcyprobabilitiesoutlined in
thesecondspecification.
Table5:EffectofWeightedInterestRateCapsonHouseholdBankruptcyRates(2ndSpecification)
DependantVariable:BinaryHouseholdDeclaringBankruptcy
Observations:22,204
(1)
AnnualincomeIsbetween32kand55k 0.0105
(0.0059)
AnnualIncomeisbetween55kand80k 0.008
(0.006)
AnnualIncomeisbetween80kand119k -0.0197
(0.0059)
AnnualIncomeisabove120k -0.0147
(0.0061)
Agebetween25and34 0.030
(0.0071)
Agebetween35and44 0.0539
(0.0070)
57
Agebetween45and54 0.0715
(0.007)
Agebetween55and59 0.069
(0.008)
Agebetween60and64 0.0523
(0.0078)
Agebetween65and69 0.042
(0.0078)
Ageabove70 0.0167
(0.0062)
HasCollegeDiploma 0.0158
(0.0055)
HasUniversityDegree -0.0007
(0.0004)
HasGraduateDegree -0.0258
(0.004)
HasaCreditCard -0.0794
(0.007)
HasStruggledToMaintainaBudget 0.0524
(0.0047)
HasaLateFeeonOneBill 0.0607
(0.009)
HasaLateFeeonMorethanOneBill 0.1077
(0.0214)
TotalDebtLessthan50k 0.0368
(0.0048)
TotalDebtbetween50kand99k 0.0356
(0.0079)
TotalDebtbetween100kand149k 0.037
(0.0087)
TotalDebtbetween150kand199k 0.0272
(0.009)
58
TotalDebtbetween200kand249k 0.024
(0.0098)
TotalDebtabove250k 0.028
(0.008)
HasusedaPaydayLoanserviceonceinthepast12months 0.2105
(0.0407)
HasUsedaPaydayLoanServicemorethanonceinthePast
12months 0.0985
(0.0217)
Log(PopulationWeightedInterestRateCaps) -0.0053
(0.0017)
White'sStandardErrorsCorrectionApplied Y
Note:This table reportsOLSestimation results fora linearprobabilitymodel regressionofvariouscharacteristics that may affect the probability of an individual declaring bankruptcy. Populationweightedinterestratecapsareusedasanexogenousvariable.Inclusionofcertainvariablesthatarestatisticallyinsignificantisbasedoneconomicvalueassociatedwiththevariable.StandardErrorsareinparentheses.
Therelationshipofeachindependentvariabletothedependentvariablewas
in line with previous economic expectations, such as increasing education was
negatively correlated with bankruptcy rates. Financial challenge independent
variableswerealsoinlinewitheconomicexpectations,ashavingaccesstoacredit
cardwas negatively correlatedwith bankruptcy rates aswell as variables dealing
with financial struggleswere positively correlated. Repeat payday borrowingwas
also positively correlated with bankruptcy rates indicating that individuals who
enterintocyclesofdebtcanfinditdifficulttoexit.Theimpactofrepeatborrowing
wassmallerthanborrowingonlyonce.Thislikelyindicatesthatindividualswhoare
unabletopaybacktheinitialpaydayloanareforcedoutofthepaydayloanmarket
towhichtheyaremorelikelytodeclarebankruptcy.Thefeesattachedtotherepeat
59
paydayloansaresignificantlyhigherbutthedifferencebetweenthesevariablesmay
indicate borrowers who are not at the extreme level of credit risk who pay the
higher fees. Each independent variables impact on the dependent variable is
explainedinfurtherdetailwithinTable6.
Table6:VariableResultsExplanation(2ndSpecification)
AnnualincomeIsbetween32k
and55k(INC32to55)
Incomebetween$32,000and$55,000ispositively
correlatedwiththeprobabilityofdeclaringbankruptcybutis
onlystatisticallysignificantatthe10%levelofsignificance.
Thiscanpossiblybecausedbyalackofcreditalternativesfor
individualswithinthisincomebracket.
AnnualIncomeisbetween56k
and80k(INC56to80)
Incomebetween$56,000and$80,000ispositively
correlatedwiththeprobabilityofdeclaringbankruptcybutis
statisticallyinsignificantatalllevelsofsignificance.
AnnualIncomeisbetween80k
and119k(INC81to119)
Incomebetween$80,000and$119,000isnegatively
correlatedwiththeprobabilityofdeclaringbankruptcyandis
statisticallysignificantatthe5%levelofsignificance.This
suggeststhatcontrollingforotherfactorssuchaseducation,
onceanindividual'sincomereachesacertainpointtheyare
lesslikelytodeclarebankruptcyastheylikelyhaveenough
incometolivewithintheirmeans.
AnnualIncomeisabove120k Incomeabove$120,000isnegativelycorrelatedwiththe
60
(INC120up) probabilityofdeclaringbankruptcyatthe5%levelof
significance.
Agebetween25and34
(AGE25to34)
Allagebracketsarepositivelycorrelatedwithbankruptcy
ratesatthe5%levelofsignificance.However,thehighest
positivecorrelationoccurswithintheagebracketof45to54.
Thislikelyindicatesaquadraticrelationshipbetweenageand
bankruptcyrates.
Agebetween35and44
(AGE35to44)
Agebetween45and54
(AGE45to54)
Agebetween55and59
(AGE55to59)
Agebetween60and64
(AGE60to64)
Agebetween65and69
(AGE65to69)
Ageabove70(AGE70up)
HasCollegeDiploma(COLLEGE)
Havingacollegediplomaispositivelycorrelatedwith
declaringbankruptcyatthe5%levelofsignificance.This
indicatesthatindividualswithonlyacollegeeducationlikely
stilllackenoughproperfinancialliteracytomanagetheir
financesappropriately.Additionallythiscanmeanthatitmay
bemoredifficultfortheseindividualstoobtainhigherlevels
ofemployment,whichwouldprovidehigherlevelsof
income.
61
HasUniversityDegree(UNIDeg)
Havingauniversitydegreeisnegativelycorrelatedwith
declaringbankruptcybutisstatisticallyinsignificantatall
levelsofsignificance.Thisindicatesthatindividualswitha
universitylikelycentreatthemarginfortheprobabilityof
declaringbankruptcy.
HasGraduateDegree(Grad)
Havingagraduatedegreeisnegativelycorrelatedwith
declaringbankruptcyandisstatisticallysignificantatthe5%
levelofsignificance.
HasaCreditCard(CCard)
Havingacreditcardisnegativelycorrelatedwithdeclaring
bankruptcyandisstatisticallysignificantatthe5%levelof
significance.Thisindicatesthatindividualswhohaveaccess
toanotherformofcreditfrompaydayloansdonothaveto
enterthismarket.
HasStruggledToMaintaina
Budget(BUDSTRG)
Strugglingtomaintainabudgetispositivelycorrelatedwith
declaringbankruptcyandisstatisticallysignificantatthe5%
levelofsignificance.Thisindicatesthatindividualswhomay
sufferfromforecastingproblemsandmyopictime
preferencesaremorelikelytodeclarebankruptcy.
62
HasaLateFeeonOneBill
(LateFee1)
Havingalatefeeononebillispositivelycorrelatedwith
declaringbankruptcyandisstatisticallysignificantatthe5%
levelofsignificance.Thisindicatesthatindividualswhoallow
onebilltobecomepastduearemorelikelytodeclare
bankruptcy.
HasaLateFeeonMorethan
OneBill(LateFee2)
Havingalatefeeonmorethanonebillispositively
correlatedwithdeclaringbankruptcyandisstatistically
significantatthe5%levelofsignificance.Thisindicatesthat
individualswhoallowmultiplebillstobecomepastdueare
morelikelytodeclarebankruptcy.
TotalDebtLessthan50k
(DEBTLESS50)
Alltotaldebtbracketsarepositivelycorrelatedwith
declaringbankruptcyandarestatisticallysignificantatthe
5%levelofsignificance.Thevariablewiththehighest
correlationtotheprobabilityofdeclaringbankruptcywas
totaldebtbetween$100,000and$149,000.
TotalDebtbetween50kand99k
(DEBT50to99)
TotalDebtbetween100kand
149k(DEBT100to149)
TotalDebtbetween150kand
199k(DEBT150to199)
TotalDebtbetween200kand
249k(DEBT200to249)
TotalDebtabove250k
(DEBT250up)
63
HasusedaPaydayLoanservice
onceinthepast12months
(Payday1)
Havingusedapaydayloanserviceispositivelycorrelated
withtheprobabilityofdeclaringbankruptcyatthe5%level
ofsignificance.Thisindicatesthatindividualswhoparticipate
withinthepaydayloansmarketaremorelikelytodeclare
bankruptcy.
HasUsedaPaydayLoanService
morethanonceinthePast12
months(ReppDay)
Havingusedapaydayloanservicemultipletimesispositively
correlatedwiththeprobabilityofdeclaringbankruptcyatthe
5%levelofsignificance.
Log(PopulationWeighted
InterestRateCaps)
(Log(WLEGCAP))
Populationweightedinterestratecapsarenegatively
correlatedwiththeprobabilityofdeclaringbankruptcyatthe
5%levelofsignificance.Thisindicatesthatindividualsatthe
marginarelesslikelytoenterthepaydayloansmarketwhen
pricesincrease.However,desperateborrowerswillstill
sufferthehigherprobabilityofbankruptcy,astheyhaveno
alternatives.
64
65
4.7CombinedSpecificationAnalysis
From the combination of the two specifications, I find no evidence that
increasedaccess topayday loans isbeneficial forborrowers.My first specification
indicates that as interest rates increase the supply of payday loans increases to
include higher risk borrowers. Combined with the conclusions from the second
specification that usage of payday loans increases the probability of declaring
bankruptcy it ishard todistinctivelyestablishanypositivebenefit.However, from
thedatathatisavailable,lackofaccesstocreditisalsounabletobedeterminedto
be a better option for these borrowers. Many borrowers would rather pay
significantlyhigherfeesandruntheriskofdeclaringbankruptcythanexperiencea
numberofnegativeeffectsfromlackofaccesstocredit.Theprobabilityofdeclaring
bankruptcy from increased access to credit is positively correlated but rational
borrowers may still prefer the added risk of bankruptcy to the negative welfare
effectofhavingavehiclerepossessedorfaceeviction.
66
67
5.Conclusion
Utilizing political differences in payday loan regulation and legislation I
investigate whether low or moderate-income individuals benefit from increased
access to credit. The market for payday loans within Canada is one that is of
particular interest,because formanyof theseborrowers this is theonly sourceof
credit available. Changes in legislative policy have a direct effect on a borrower’s
access to credit, which can translate into positive or negative economic effects. It
showsanegativeeconomiceffectthroughthehighcostsassociatedwiththeseloans
andthetendenciesfortheseborrowerstoengageinhabitualborrowing.Itshowsa
positiveeconomiceffectthroughincreasedaccesstocredit,whichcanprovidesome
borrowerscreditthattheypreviouslydidnothaveaccessto.
Measuringtheoverallwelfarecontributionofpaydayloanaccessisdifficult;
instead I investigate a specific measure of welfare: the probability of declaring
bankruptcy. This is partly due to a lack of data available tomeasure payday loan
effects in Canada. I combine the results of this investigationwith an investigation
intothecharacteristicsofpaydayloanborrowers.CombiningthetwospecificationsI
amabletocommentonchangesinsupplyofborrowersbasedonchangesinaccess
topaydayloansaswellasthepotentialwelfareeffectsthatthesechangescanhave.
From this analysis, I believe there are recommendations for policy to possibly
improveoverallwelfareofborrowers.
Twopolicyrecommendationsflowoutofmyanalysis.First,toimprove
measurementsoftheimpactsofpaydaylendingwithinCanada,eachprovince
68
shouldimplementpolicytotrackandsharepaydaylendingusagedata.Thiswould
allowprovincialgovernmentstoquantifytheeffectsofpaydaylendingoperations
betterandcreatemoreeffectivepolicy.Second,duetothehighprobabilityofpayday
loanborrowersrelyingonregularpaydayloanstomanagerequiredexpenses,
changestocontinuousborrowingpoliciesarerecommended,specificallyallowance
oflongerpaymentschedulestopayoffthepaydayloans.Iflegislationincreases
restrictionsoninterestrates,thatmaybecounter-productivebecauseitwillleadto
increasedcreditrationing,meaningmoreborrowerswillbeexcludedfromthe
market,andunabletoobtainneededfunds.Iflegislationreducesthepercentageof
take-homepaythatpaydayoperationsarepermittedtolend,thatmaynotprovide
borrowerswithsufficientfundsneededtoaddressafinancialshock.Asaresult,this
stillpushespeopleoutofthesolutionofferedbypaydayoperations.Athirdpolicy
optionistoimposeapaymentschedulethatrequirespaydayloanstoberepaid
evenlyovertwoormorepayperiods,therebymakingtheloanrepaymentmore
affordable.Thisshouldreducethenumberofrepeatloansrequiredtomeetroutine
expenses.
69
6.Appendix
ThisisthedatausagelicenseIobtainedinordertoaccessthevarioushouseholdsurveysusedformyspecifications.Allofthisdatawasusedforthepurposeofmythesisandnotforfinancialgain.
70
71
72
73
7.References
1. Agarwal,Sumit,PaigeM.Skiba,andJeremyTobacman.Paydayloansandcredit
cards:Newliquidityandcreditscoringpuzzles?.No.w14659.NationalBureauof
EconomicResearch,2009.
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