Updates from Chicago Booth

Given an out, people still fall back into debt
Research finds that keeping people out of debt traps isn’t as simple as paying off their loans
By Dee Gill – To the frustration of financial counselors everywhere, millions of people doom themselves to perpetual debt by repeatedly taking out small but expensive short-term loans they can barely afford. In the United States, these typically come from payday or car title lenders and go to financially strapped individuals.

In developing countries, small-scale entrepreneurs rely on daily or weekly loans for working capital. In both cases, borrowers pay exorbitant interest rates and, often, additional fees to extend a loan over and over. Interest payments can quickly add up to more than the loan amount.

Understanding how people get sucked into these debt traps is an important public-policy issue, according to Northwestern’s Dean Karlan, Chicago Booth’s Sendhil Mullainathan, and Harvard’s Benjamin N. Roth.

They conducted a series of experiments with indebted entrepreneurs in India and the Philippines and find that having their short-term loans paid off took the participants out of debt only temporarily. The entrepreneurs in question quickly took out new, profit-sapping loans. more>

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