Extreme temperatures and low-income household finance: evidence from payday loans

Extreme temperature shocks, intensified by climate change, are becoming increasingly frequent and severe, yet their effects on household credit conditions remain underexplored. Using loan-level payday lending data, we show that extreme temperature shocks increase demand for high-cost credit, reduce payday loan credit availability, and worsen loan performance through higher delinquency and default rates. We explore potential mechanisms using borrower income information and differences between online and storefront lenders. Our findings reveal how extreme temperature events can amplify financial vulnerability among credit-constrained households, particularly in the absence of formal disaster assistance for such events. This study finds that extreme heat increases demand for payday loans, while reducing access to credit and raising default rates. This suggests that heat shocks can deepen financial strain among low-income households.