Could Restrictions on Payday Lending Hurt Consumers?

The payday loan, or more generally, the deferred deposit loan, is among the most contentious forms of credit. It typically signifies a small-dollar, short-term, unsecured loan to a high-risk borrower, often resulting in an effective annual percentage rate of 390% -- a rate well in excess of usury limits set by many states. Consumer advocates argue that payday loans take advantage of vulnerable, uninformed borrowers and often create "debt spirals." A substantial volume of literature has examined the dangers of payday lending, yet few studies have focused on any unintended consequences of restricting such lending. This article examines payday lending and provides new empirical evidence on how restrictions could affect consumers. The results of its empirical analysis support the idea that restricting payday lending may indeed have costs. The evidence showed that consumers in low-income counties may have limited access to credit in the absence of payday loan options. Therefore, policymakers must carefully weigh the costs of payday lending restrictions against its benefits.