People who borrow from short-term, high-interest lenders such as payday loan companies are 38% more likely to rate their health as poor or fair, a new report has found.



The research, by a group of PhD students at the University of Washington and published in the journal Health Affairs, is one of the first empirical analyses of the health effects of “fringe” banking products.

“Most prior research on the topic focuses exclusively on the financial consequences of the loan, whether borrowers are better or worse off financially,” said Jerzy Eisenberg-Guyot, lead author of the study. “We thought it was too restrictive of a way to look at it.”

Other research has looked at the deleterious health effects of debt in general but not different kinds of debt, Eisenberg-Guyot said. For example, studies had not looked at the health effects of using payday loans versus conventional mortgages.

The University of Washington study examined the so-called fringe banking industry, which includes all sorts of short-term, high-interest loans, including payday, pawn shop and car title loans.

Eisenberg-Guyot and his co-authors performed a statistical analysis on data from the Current Population Survey, collected by the US Census Bureau, and a supplemental survey by the Federal Deposit Insurance Corporation run between 2011 and 2015.

Participants were asked whether they would “say your health is in general” either “poor/fair” or “good/very good/excellent”. People who answered were then compared with groups with similar backgrounds, because poor, less-educated and minority Americans are more likely to report worse health overall.

People who had reported poor health within three months before using a fringe banking product were excluded; so were people with an existing disability.

Researchers found use of fringe banking products and being “unbanked” (without a formal bank account) were “associated with worse self-rated health”.

“This research adds to the growing evidence that connects specific kinds of household debt and financial exclusion to poor health,” the researchers said.

One weakness of the study, they said, is the possibility for “reverse causation” – that people in poor health are more likely to use fringe banking products.

The payday lending industry and other fringe banking products barely existed three decades ago, before politicians began to steadily deregulate the short-term lending industry and community banks began to disappear.

According to the new study, payday loans have boomed in the last 20 years. In 1998, the industry extended $10bn in short-term loans. In 2011, it loaned $48bn. Interest on short-term credit loans, usually used by low-income people for essentials like rent, food or car repairs, can be up to 600% a year.

Some former customers have described the industry as “legalized loan sharking”; payday lenders in particular came under scrutiny by the Consumer Financial Protection Bureau under the Obama administration.

However, after lobbying by the industry, the Trump administration ended investigations. A harsh critic of consumer protections, Mick Mulvaney, now leads the agency.

“Future research should explore in more depth how the two-tier US financial system – one for the wealthy and one for the poor – affects health and worsens health inequalities”, the researchers said.