Abstract

Payday loans are worth exploring due to the intertwined effect of the traumatic financial burden caused by its high interest rate as well as the rigid demand for it from the credit-constrained population. While most previous literature focuses on the welfare impact of government intervention on payday loans, this paper explores the possibility of incentivizing payday lenders to cut interest rates without legislation. This paper analyzes the potential for a marginal reduction in the cost of borrowing to reduce the default rate hence creating a win-win situation for the borrowers and the lender. Using the synthetic control method, this paper examines the impact of a slight decline in the maximum fee charged for $300 value of payday loan on the proportion of payday borrowers that have relatively high income. The result suggests that a slight decline in the fee charged is likely to attract borrowers with higher income hence lower default risk, which can benefit payday lender and the borrower, creating a win-win situation.

Keywords: payday loan, synthetic control method

How to Cite:

Zheng, H., (2025) “Can Lowering Cost of Borrowing in Payday Loans Create a Win-Win Situation for the Borrower and Lender”, UCL Journal of Economics 4(1). doi: https://doi.org/10.14324/111.444.2755-0877.2040