The Effect of Repayment Through Payroll Deduction on Personal Loan Interest Rates

This paper examines the impact of payroll debit loans - a Brazilian new modality of credit - on interest rates. The main characteristic of the new credit operation is the enforcement of a direct deduction of amortizations from personal payroll checks. Adapting a matching strategy proposed by Heckman, LaLonde and Smith (1999), and using a data sample that considers individuals that take out bank loans both with and without payroll deductions, we find that the new modality reduces loan interest rates significantly. Nevertheless, this reduction is half of what was expected using aggregate data. Besides these, the paper presents a sensitivity analysis for the case of sequential banking