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>
- How can start-ups scale up? [VIDEO]
- Don’t write off a ‘failed’ entrepreneur, Waverly Deutsch
- Should companies report annually instead of quarterly? Emily Lambert