Payday Lending: New Research and the Big Question
John P. Caskey
Swarthmore CollegeOctober 2010
Payday lending is controversial. In the states that allow it, payday lenders make cashloans that are typically for $500 or less that the borrower must repay or renew on his or her next payday. The finance charge for the loan is usually 15 to 20 percent of the amount advanced, sofor a typical two-week loan the annual percentage interest rate is about 400 percent.In this article, I briefly describe the payday lending business and explain why it presentschallenging public policy issues. The heart of this article, however, surveys recent research thatattempts to answer what I call the "big question,” one that is fundamental to the public policydispute: Do payday lenders, on net, exacerbate or relieve customers’ financial difficulties?It is easy to make the case that payday lending should be beneficial. The terms of a pay-day loan are easy to understand and no one is forced to take a loan. If people choose to do so, itmust be because they believe it to be their best alternative. To make this concrete, consider oneexample. Suppose that I am one week away from my payday, my bank account is nearly empty,I don't have a credit card or I've already borrowed to the limit on my card, and I have some billsto pay. I could write checks to pay the bills, knowing that I will pay a $30 non-sufficient funds
The views expressed here are those of the author and do not necessarily represent the views of the Federal ReserveBank of Philadelphia or the Federal Reserve System. This paper is available free of charge atwww.philadelphiafed.org/research-and-data/publications/working-papers/.
This paper will be a chapter in the forthcoming
Oxford Handbook of the Economics of Poverty
, edited by PhilipJefferson. I would like to thank Brian Melzer, Don Morgan, Adair Morse, and Jonathan Zinman for their commentson an earlier draft of this paper. This does not mean that they agree with my descriptions of their work or my over-view of the relevant research.