Let the Borrower Beware: Towards a Framework for Debiasing Rollover Behavior in the Payday Loan Industry

  • T. R. Harmon-KizerEmail author
Original Paper


Each year, millions of Americans take out payday loans, marketed as short-term bridge loans until their next payday. Characterized by triple-digit annual percentage rates (APRs) and mandatory balloon payments, many consumers default of their loans, forcing them to repeatedly extend, or rollover their initial loan. This process is repeated until the borrower is able to repay the principal and accumulated fees. This article offers a behavioural analysis of the propensity of consumers to rollover payday loans. Cognitive biases taken from the behavioural economics literature are employed to explain why consumers are likely to rollover high-interest payday loans and how lenders capitalize off of a consumer’s biased decision-making. Namely, biases dealing with optimism, imperfect self-control, status quo, and hyperbolic discounting are discussed in the context of payday loan borrowing. Fischoff’s (1981) debiasing framework is employed to inform policy interventions geared towards payday lenders which could result in optimal decision-making for borrowers.


Payday loans Consumer welfare Behavioural economics Truth in Lending Act Mandatory disclosures 



  1. Advance America. (n.d.). Frequently asked questions. Retrieved from Accessed 24 Feb 2015.
  2. Agarwal, S., Skiba, P., & Tobacman, J. (2009). Payday loans and credit cards new liquidity and credit scoring puzzles? (NBER Working Paper No. 14659).Google Scholar
  3. Akerlof, G., & Kranton, R. (2000). Economics and identity. The Quarterly Journal of Economics, 3, 715–753 Retrieved from Accessed March 15, 2015.CrossRefGoogle Scholar
  4. Akerlof, G. A., & Kranton, R. (2010). Identity economics. The Economists' Voice, 7(2), 1–3.CrossRefGoogle Scholar
  5. Batty, E., & Flint, J. (2010). Self-esteem, comparative poverty and neighborhood (Research Paper No. 7, July 2010). Centre for Regional Economic and Social Research, Sheffield Hallam University. Retrieved from Accessed February 24, 2015.
  6. Bell, C., Gorin, D., & Hogarth, J. (2009). Does financial education affect soldiers’ financial behaviors? Federal Reserve System Community Affairs Research Conference 2009. Retrieved from Accessed February 24, 2015.
  7. Bertrand, M., & Morse, A. (2011). Information disclosure, cognitive biases, and payday borrowing. The Journal of Finance, 66(6), 1865–1893.CrossRefGoogle Scholar
  8. Bertrand, M., Mullainathan, S., & Shafir, E. (2006). Behavioral economics and marketing in aid of decision making among the poor. Journal of Public Policy and Marketing, 25(1), 8–23.CrossRefGoogle Scholar
  9. Bhutta, N. (2014). Payday loans and consumer financial health. Journal of Banking & Finance, 47, 230–242.CrossRefGoogle Scholar
  10. Campbell, J. Y. (2016). Restoring rational choice: The challenge of consumer financial regulation. American Economic Review, 106(5), 1–30.CrossRefGoogle Scholar
  11. Campbell, D., Asia Jerez, F., & Tufano, P. (2012). Bouncing out of the banking system an empirical analysis of involuntary bank account closures. Journal of Banking and Finance, 36, 1224–1235.CrossRefGoogle Scholar
  12. Carvalho, L. S., Meier, S., & Wang, S. W. (2016). Poverty and economic decision-making evidence from changes in financial resources at payday. American Economic Review, 106(2), 260–284.CrossRefGoogle Scholar
  13. Congdon, W. J., Kling, J. R., & Mullainathan, S. (2011). Policy and choice: Public finance through the lens of behavioral economics. Washington DC: Brookings Institution Press.Google Scholar
  14. Consumer Financial Protection Bureau. (2013). Payday loans and deposit advance products a white paper of initial data findings. Retrieved from Accessed February 16, 2015.
  15. Consumer Financial Protection Bureau. (2017). Payday, vehicle title, and certain high-cost installment loans. Retrieved from Accessed 24 Jan 2019.
  16. Croskerry, P., Singhal, G., & Mamede, S. (2013). Cognitive debiasing 2: Origins of bias and theory of debiasing. BMJ Quality & Safety, 22(Suppl 2), ii65–ii72.CrossRefGoogle Scholar
  17. Day, K., Green, G., & Crowell, C. (2009). Phantom demand payday lenders create their own demand with loan terms that generate rapid re-borrowing. Center for Responsible Lending. Retrieved from Accessed Feb 24, 2015.
  18. Desai, C. A., & Elliehausen, G. (2017). The effect of state bans of payday lending on consumer credit delinquencies. The Quarterly Review of Economics and Finance, 64, 94–107.CrossRefGoogle Scholar
  19. Fischoff, B. (1981). Debiasing (No. PTR-1092-81-3). Eugene, OR: Decision Research.Google Scholar
  20. Fischoff, B. (1982). Debiasing. In D. Kahneman, P. Slovic, & A. Tversky (Eds.), Judgment under uncertainty heuristics and biases (pp. 422–444). Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  21. Francis, K. (2010). Rollover, rollover a behavioral law and economics analysis of the payday-loan industry. Texas Law Review, 88(February), 611–638.Google Scholar
  22. Graves, S. (2003). Landscapes of predation, landscapes of neglect: A location analysis of payday lenders and banks. The Professional Geographer, 55(3), 303–317.Google Scholar
  23. Hilgert, M., Hogarth, J., & Beverly, S. (2003). Household financial management: The connection between knowledge and behavior. Federal Reserve Bulletin, 89(7), 309–323.Google Scholar
  24. Ideas24. (2014). Poverty interrupted: Ending intergenerational poverty with behavioral economics (Working Paper). Retrieved from Accessed 15 Oct 2018.
  25. King, U., Li, W., Davis, D., & Ernst, K. (2005). Race matters: The concentration of payday lenders in African- American neighborhoods in North Carolina. Research Report by the Center for Responsible Lending. Retrieved from Accessed 24 Feb 2015.
  26. Li, W., Parrish, L., Ernst, K., & Davis, D. (2009). Predatory profiling: The role of race and ethnicity in the location of payday lenders in California. Center for Responsible Lending. Retrieved from Accessed on February 24, 2015.
  27. Lohrentz, T. (2013). The net economic impact of payday lending in the U.S. . Insight Center for Community Economic Development. Retrieved from: Accessed on January 20, 2019.
  28. Lusardi, A., & Mitchell, O. S. (2011a). Financial literacy and retirement planning in the United States. Journal of Pension Economics and Finance, 10(4), 509–525.CrossRefGoogle Scholar
  29. Lusardi, A., & Mitchell, O. S. (2011b). Financial literacy and planning: implications for retirement wellbeing. In O. S. Mitchell & A. Lusardi (Eds.), Financial literacy: implications for retirement security and the financial marketplace (pp. 17–39). Oxford: Oxford University Press.CrossRefGoogle Scholar
  30. Lusardi, A., Michaud, P. C., & Mitchell, O. S. (2017). Optimal financial knowledge and wealth inequality. Journal of Political Economy, 125(2), 431–477.CrossRefGoogle Scholar
  31. Lynch, J. G., Jr., & Zauberman, G. (2007). Construing consumer decision making. Journal of Consumer Psychology, 17(2), 107–112.CrossRefGoogle Scholar
  32. MacLeod, C., Koster, E. H., & Fox, E. (2009). Whither cognitive bias modification research? Commentary on the special section articles. Journal of Abnormal Psychology, 118(1), 89.CrossRefGoogle Scholar
  33. Mann, R. (2013). Assessing the optimism of payday loan borrowers. Supreme Court Economic Review, 21(1), 105–132.CrossRefGoogle Scholar
  34. Meier, S., & Sprenger, C. (2010). Present-biased preferences and credit card borrowing. American Economic Journal Applied Economics, 2(1), 193–210.CrossRefGoogle Scholar
  35. Morse, A. (2011). Payday lenders heroes or villains? Journal of Financial Economics, 102(1), 28–44.CrossRefGoogle Scholar
  36. Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. New York: Macmillan.Google Scholar
  37. Perry, V., & Blumenthal, P. (2012). Understanding the fine print: The need for effective testing of mandatory mortgage loan disclosures. Journal of Public Policy and Marketing, 31(2), 305–312.CrossRefGoogle Scholar
  38. Perry, V., & Morris, M. (2005). Who is in control? The role of self-perception, knowledge, and income in explaining consumer financial behavior. The Journal of Consumer Affairs, 39(2), 299–313.CrossRefGoogle Scholar
  39. Pew. (2012). Payday lending in America: Who borrows, where they borrow, and why. Pew Safe Small-Dollar Loans Research Project. Retrieved from Accessed on January 20, 2019.
  40. Pew. (2015). Small dollar loans. Pew Safe Small-Dollar Loans Research Project Retrieved from: Accessed on February 24, 2015.
  41. Phelps, E. S., & Pollak, R. A. (1968). On second-best national saving and game-equilibrium growth. The Review of Economic Studies, 35(2), 185–199.CrossRefGoogle Scholar
  42. Piketty, T., & Goldhammer, A. (2014). Capital in the twenty-first century. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  43. Reyna, V. F., & Brainerd, C. J. (2007). The importance of mathematics in health and human judgment: Numeracy, risk communication, and medical decision making. Learning and Individual Differences, 17(2), 147–159.CrossRefGoogle Scholar
  44. Robinson, J., & Lewis, G. (1999). The developing payday advance business, the next innings from emergence to development. Little Rock: AR Stephens, Inc..Google Scholar
  45. Rotter, J. (1954). Social learning and clinical psychology. New York Prentice Hall, Inc..Google Scholar
  46. Samuelson, W., & Zeckhauser, R. (1988). Status quo bias in decision making. Journal of Risk and Uncertainty, 1(1), 7–59.CrossRefGoogle Scholar
  47. Sanna, L. J., Schwarz, N., & Stocker, S. L. (2002). When debiasing backfires: Accessible content and accessibility experiences in debiasing hindsight. Journal of Experimental Psychology Learning, Memory, and Cognition, 28(3), 497.CrossRefGoogle Scholar
  48. Simon, H. A. (1957). Models of man; social and rational. Oxford: Wiley.Google Scholar
  49. Skiba, P., & Tobacman, J. (2008). Do payday loans cause bankruptcy? (Vanderbilt Law and Economics Research Paper, No. 11-13).Google Scholar
  50. Thaler, R. (1990). Anomalies: Saving, fungibility, and mental accounts. Journal of Economic Perspectives, 4(1), 193–205.CrossRefGoogle Scholar
  51. Thaler, R. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12(3), 183–206.CrossRefGoogle Scholar
  52. Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty heuristics and biases. Science, 185(4157), 1124–1131.CrossRefGoogle Scholar
  53. Weinstein, N. (1980). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 39(5), 806–820.CrossRefGoogle Scholar
  54. Zeiler, K. (2010). Cautions on the use of economics experiments in law. Journal of Institutional and Theoretical Economics, 166(1), 178–193.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Crummer Graduate School of BusinessRollins CollegeWinter ParkUSA

Personalised recommendations