BEHAVIOR
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8 WORLD DEVELOPMENT REPORT 2015<br />
Figure O.2 Reframing decisions can improve welfare: The case of payday borrowing<br />
a. The standard envelope<br />
A payday borrower receives his cash in an envelope. The standard envelope shows only a calendar and the due date of the loan.<br />
b. The envelope comparing the costs of the payday loan and credit card borrowing<br />
In a field experiment, randomly chosen borrowers received envelopes that showed how the dollar fees accumulate when a payday loan is outstanding<br />
for three months, compared to the fees to borrow the same amount with a credit card.<br />
2 weeks $45 2 weeks<br />
1 month $90 1 month<br />
Borrowers who received the envelope with the costs of the loans expressed in dollar amounts were 11 percent less likely to borrow in the next four<br />
months compared to the group that received the standard envelope. Payday borrowing decreased when consumers 2 months could think more $180 broadly about 2 months<br />
the true costs of the loan.<br />
3 months $270 3 months<br />
Source: Bertrand and Morse 2011.<br />
Note: APR = annual percentage rate.<br />
How much it will cost in fees or interest if you borrow $300<br />
How much it will cost in fees or interest if you borrow How much $300it will cost in fees or interest if you borrow $300<br />
PAYDAY LENDER<br />
CREDIT CARD<br />
PAYDAY LENDER<br />
CREDIT CARD<br />
(assuming PAYDAY a 20% APR) LENDER<br />
CREDIT CARD<br />
(assuming a 20% APR)<br />
If you repay in:<br />
(assuming If you two-week repay fee in: is $15 per $100 loan)<br />
(assuming a 20% APR)<br />
If you repay in:<br />
If you If repay you repay in: in:<br />
If you repay in:<br />
2 weeks $45 2 weeks $2.50<br />
weeks $45 weeks $2.50<br />
1 month $90 1 month<br />
2 weeks<br />
$5 How<br />
$45<br />
much it will cost in<br />
2 weeks<br />
fees or interest if you<br />
$2.50<br />
b<br />
month $90 month $5<br />
2 months $180 2 months<br />
1 month<br />
$10<br />
$90 1 month $5<br />
months $180 months $10<br />
3 months $270 3 months<br />
2 months PAYDAY<br />
$15<br />
$180 LENDER 2 months CRED $10<br />
months $270 months (assuming<br />
3 months $15two-week fee is $15 per $100 loan)<br />
(assumin<br />
$270 3 months $15<br />
If you repay in:<br />
If you<br />
(assuming two-week fee is $15 per $100 loan)<br />
(assuming two-week fee is $15 per $100 loan)
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