Research on Nonbank Loans and Financial Services

Millions of Americans, especially those with low-incomes, use alternative financial sector (AFS) loans—such as payday loans, car title loans, and refund anticipation loans—to meet their short‐term needs. These loans often start out small but can add up to significant debt burdens and can undermine a family's ability to build assets. To design more effective financial products for low- and moderate-income households, we need a better understanding of what motivates them to use these loans. We also need to know the benefits and risks to individuals and communities when households rely on these services. Public policy has an important role to play in protecting consumers from abusive terms and products, while ensuring that they have continued access to small-dollar loans to meet their credit needs.

The Urban Institute took on a one-year project studying financial service products. The following are five of our new analyses and findings:

  • Report on Prohibitions, Price Caps, and Disclosures: Provides a nationally representative picture of the relationship between state alternative financial sector policies and consumer use across five AFS products.
  • Report on Refund Anticipation Loans and Refund Anticipation Checks: Assesses who uses refund anticipation loans and checks and why, by examining tax return data and conducting interviews with tax return preparers and stakeholders.
  • State AFS Policy Data: Documents restrictions on five small-dollar products (auto title loans, pawnshop loans, payday loans, refund anticipation loans, and rent-to-own agreements) in all 50 states and the District of Columbia between 2004 and 2009.
  • Literature Review: Highlights key findings of research on five small-dollar loan credit products—auto title loans, pawnshops, payday lending, refund anticipation loans and checks, and rent-to-own.
  • Expert Convening on Future Research DirectionsSummarizes findings from a one-day US Department of the Treasury event that gathered 50 researchers from academia, government, and the nonprofit sector, as well as industry and foundation representatives. Participants identified what research policymakers need to help meet the demand for small-dollar credit among underserved populations.

Prohibitions, Price Caps, and Disclosures: A Look at State Policies and Alternative Financial Product Use
Signe-Mary Mckernan, Caroline Ratcliffe, Daniel Kuehn

Using new nationally representative data from the National Financial Capability State-by-State Survey, this paper examines the relationship between state-level alternative financial service (AFS) policies (prohibitions, price caps, disclosures) and consumer use of five AFS products: payday loans, auto title loans, pawn broker loans, RALs, and RTO transactions. The results suggest that more stringent price caps and prohibitions are associated with lower product use and do not support the hypothesis that prohibitions and price caps on one AFS product lead consumers to use other AFS products.

Who Needs Credit at Tax Time and Why: A Look at Refund Anticipation Loans and Refund Anticipation Checks
Brett Theodos, Rachel Brash, Jessica F. Compton, Karen Masken, Nancy Pindus, C. Eugene Steuerle

Refund Anticipation Loans (RALs) and Checks (RACs) are controversial financial products used by one in seven tax filers. This report presents findings on many of the most important individual and geographical characteristics influencing RAL/RAC use, as well as, insights about product use from tax preparers, RAL/RAC lenders, RAL/RAC tax form software developers, low-cost RAL lenders, and Volunteer Income Tax Assistance (VITA) program sites. The results suggest that factors such as lack of interest income, geographic location, EITC receipt, filing as a head-of-household, income, and living in a poor neighborhood, each independently contributes strongly to RAL/RAC use.

State Restrictions on Small-Dollar Loans and Financial Services, 2004–2009: Summary, Documentation, and Data
Nancy Pindus, Daniel Kuehn, Rachel Brash

This report documents state restrictions of five small-dollar products: auto title loans, pawnshop loans, payday loans, refund anticipation loans, and rent-to-own agreements between 2005 and 2009, in all states and the District of Columbia. Researchers find that over half of states prohibit auto title loans while a much smaller number of states prohibit payday loans. Nearly all states cap prices on at least one of the five products and the majority of states cap interest rates for pawnshops and payday lenders. Fewer than half of states impose disclosure requirements or price caps on rent-to-own agreements.

Research on Financial Behaviors and Use of Small-Dollar Loans and Financial Services
Brett Theodos, Jessica F. Compton

Millions of American households, especially those in the bottom half of the income distribution, use nonbank credit products. This credit, while small in initial denomination, can add up to significant debt burdens for those who can least afford it. Yet, the extensive use of alternative financial sector services indicates that consumers perceive such services to be useful or necessary. This summary provides an overview of research on this sector. It reviews literature on five small-dollar credit products and financial services: auto title loans, pawnshops, payday lending, refund anticipation loans and checks, and rent-to-own borrowing.

Summary on Developing a Research Agenda on Small-Dollar Credit and Financial Empowerment
Signe-Mary Mckernan, Jessica F. Compton

The US Department of the Treasury gathered 50 foundation representatives and researchers from academia, government, the nonprofit sector, and industry to participate in the convening Developing a Research Agenda on Small-Dollar Credit and Financial Empowerment.This summary provides key insights from the one-day event including discussions on both the demand for and supply of small-dollar credit and what participants identified as research needed to inform policymaking in order to address the challenges related to meeting the small-dollar credit needs of underserved populations, notably low- and moderate-income individuals.