Recent research on the effects of credit access among low- and moderate-income
households finds that high cost payday loans exacerbate, rather than alleviate, financial distress
for a subset of borrowers (Melzer (2011) and Skiba and Tobacman (2011)). In this study I find
that others, outside the borrowing household, bear a portion of these costs too: households with
payday loan access are 20% more likely to use food assistance benefits and 10% less likely to
make child support payments required of non-resident parents. These findings suggest that as
borrowers accommodate interest and principal payments on payday loan debt, they prioritize
loan payments over other liabilities like child support payments and they turn to transfer
programs like food stamps to supplement the household’s resources. To establish this finding,
the analysis uses a measure of payday loan access that is robust to the concern that state policies
governing payday lending and lender location decisions are endogenous relative to household
financial condition. The analysis also confirms that the effect is absent in the mid-1990s, prior to
the spread of payday lending, and that the effect grows over time, in parallel with the growth of
payday lending.