February 08, 2006
Payday Lending
Posted by Ronald Mann

Thanks Christine, Gordon and Vic for letting me explore the benefits of blogging.  (I think I already have figured out the costs!  Sorry for being slow. The combination of early weeks of the semester and the height of the appointments season got me behind.)

One thing I’m very interested in right now is payday lending. Obviously there have been a flurry of initiatives from state and federal regulators. It is also striking that the market appears to function quite similarly in many different countries. The most interesting gap in the literature is a thorough policy analysis of precisely what is wrong with payday lending. There are of course lots of pointed criticisms. One group (like a recent study from Ohio) argues that the market is populated with abusive operators that flagrantly violate disclosure requirements and the like. But that is a bit off point. What I am thinking about is precisely what is wrong with the model of the payday loan – a high-interest rate loan made on a very short-term basis, predominantly to customers of modest means. It seems to me that what is called for is some careful thought about whether these people are better off getting these loans at those high rates or being denied.

That seems to turn in part on two things – exactly what are people doing with the money? And what do we think about rollovers. It seems clear that the market depends a lot on people that borrow and never really completely repay their debt. But working out exactly why this is so bad is a little hard. After all, a lot of people have high credit card debts that they can’t really ever hope to repay. Why is this different? {Or perhaps they’re both unacceptable.}

The most interesting interaction, I think, is the relation between the internet based actors and the large publicly traded companies that are building branch networks in so many states. Those companies claim that everything depends on having a good location near the customer. But if you Google “payday loans” you’ll see a lot of operators, charging rates much lower than the companies with the local branches. It is easy to see how their prices could be lower – they don’t have to pay rent or buy local facilities. But I’m interested in how the market is working. Do the Internet lenders serve a higher segment of the market? Are they really a scam, profiting from “shrouded” fees like bounced-check charges and the like? What do local regulators think about them – do they regard them as wholly unlawful interlopers?

I welcome any thoughts or experiences anybody has about this. I also, very much, would welcome any suggestions for interview contacts.

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