Most pawn borrowers reject cheaper loans that reduce their default risk.

Pawn loans let people pay back what they owe whenever they want. But if they fail to repay, they lose their pawned item, which is worth more than the loan, plus any money already paid. Researchers ran an experiment in Mexico City to see if forcing a rigid schedule helps. They tested traditional flexible payments, a mandatory frequent-payments plan, and a choice between the two. The structured schedule made borrowers make frequent, regular payments instead of leaving it until the end. This structure cut borrowing costs by 19% and cut the chance of losing collateral by 17.5%. It lowered costs for almost everyone, even people who avoided it. Yet when given an open choice, only 11% of borrowers picked the structured plan voluntarily.

Why it matters

Pawnshop loans are a lifeline for millions without access to mainstream credit. This study shows that a simple change—requiring regular payments instead of lump sums—cuts borrowers' costs by 19% and reduces default by 17.5%. Yet almost no one picks it voluntarily, which raises a hard question: should defaults be nudged or mandated when what's better for people is not what they choose?

Questions answered