Are Borrowers Paid to Repay? Payday Effect in FinTech Lending

We conduct a field experiment to investigate how payday loan contracts design affects loan outcomes. Using a FinTech lending platform in Indonesia, we randomly extend the loan term by one or two days to align the loan due date with borrowers’ salary payday after the loan has been approved. Difference-in-difference estimator suggest that the extension postponing the due date after borrowers’ salary payday increases the repayment likelihood by 27%, although such loan extension does not affect loan repayment when the due date is far away from salary payday. The effect is larger for small-sized loans, borrowers with low credit ratings, and borrowers with overdue records. Our results highlight the relationship between loan contract flexibility and loan performance.