The effect of banning payday loans

n November 2008, Ohio enacted the Short-Term Loan Law which imposed a 28% APR on payday loans, effectively banning the industry. Using licensing records from 2006 to 2010, I examine if there are changes in the supply side of the pawnbroker, precious-metals, small-loan, and second-mortgage lending industries during periods when the ban is effective. Seemingly unrelated regression results show the ban increases the average county-level operating small-loan, second-mortgage, and pawnbroker licensees per million by 156, 43, and 97%, respectively.

That is from Stefanie R. Ramirez, via the excellent Kevin Lewis.

Comments

A common claim made by proponents of payday lending is that banning payday loans results in an increase in people getting money from criminal loan sharks. A claim this paper sadly does not test.

That would be interesting, but I bet that data is really hard to get!

But the broken legs that would come with the query would be free...

very good post, i definitely love this website, keep on it

I think you can infer that loan shark loans increase if those other three types of non-bank loans also increase when payday loans are banned.

Bonus trivia: in the Philippines, loan sharking is often done by Indians for some reason.

Despised ethnic minorities often engage in moneylending. Since everyone hates them anyway, they have nothing to lose.

Moneylending being a despised activity is the assumption? Do the Vedas and other Hindu literature disparage lending money? If so, maybe your thesis is right, akin to the Untouchables cleaning bedpans? Or Jews historically lending money since they're not forbidden by the Christian bible? But I think historical accident by way of networking plays a role, the Indians have a sort of informal "Western Union" network of payment via trust system; a historical accident.

Certain ethic groups, or really networks from towns of origin and/or extended families, manage to run "mafias" when in other countries.

I use the term mafia in quotes because they are not crime syndicates. They are informal lending and investment networks, with a thread of ethnic, family, or community connection. I assume there is a cultural code of reinvestment and helping others get their start.

All of the sudden, these groups quietly own, for example, low cost motels in several neighboring towns, etc.

They are not loan sharing operations however, quite the contrary.

Havala. It is called Havala. Shadow Banking before it was a thing.

Good stuff, see here: https://www.un.org/esa/desa/papers/2002/esa02dp26.pdf - hawala/hundi, chit, chop and Colombian black market peso exchange system discussed.

Bonus trivia: the first check was Babylonian. Those clay tablets with cuneiform are actually checks! See the above paper.

Read Debt: The First 5000 Years by David Graeber.

How evil!

Now lenders are only making loans using other peoples money to people with assets!

That is evil capitalism!

Bring back perpetual servitude rent seeking!

This is my shocked face.

(People want credit, especially, for good reason, poorer people.

Credit also isn't free.

Try to keep poor people from accessing one form, they';ll find others, and then you, o UMC elitist [not Tyler, the notional person who hates such loans] can try and ban those too, to "help" the poor poor people who you ... don't want to have access to credit*.

* Revealed preference. "But this credit is too expensive" neglects that poor people have agency and know about costs just like you do...)

What if people believe that secured loans, such as pawnshops and car loans, are actually better for low-income consumers than payday loans? Then this would be a good outcome.

Why can't the poor people make that decision for themselves? Maybe I'd rather pay 36% APR on a thousand dollars for two weeks ($15) than give up my engagement ring or my television for that period.

Who wouldn't? But 36% isn't an option on payday loans -- that's about an order of magnitude off. Typical vig is $15 per $100 borrowed, not per $1,000.

The OP says that APRs in excess of 28% are banned. If the legislature had banned APRs in excess of 280%, that might make more sense.

Those folks seem to feel that very few people, other than themselves, merit agency.

Poverty and agency are largely mutually exclusive.

No, most people only took these payday loans, because it was so easy to get. They didn’t have to look for it, it is advertised everywhere.
Maybe simply banning all advertisement would already have a great effect. But banning it altogether would certainly have a great effect. Maybe not for every people, but for most of them.

I thought there were recent studies that showed that most people used payday loans responsibly.

The effect, it seems to me, is to make people who would never get within a mile of a payday loan office feel better.

If these people could use money responsibly, they wouldn’t need payday loans in the first place...
Even poor people can get good credit score and therefore credit card (which is basically a payday loan for free) if they manage their little money well.

Well you know, blah blah blah free markets, poor people need credit etc.

It's easy to stay all acadamic and not instead step back and ask what does it say about a nation of people needing so much debt, struggling with debt continuously, and sinking under treadmills of snowballing debt, etc. seemingly one mishap away from debt hell, and unable to make it paycheck to paycheck.

Really, seriously. What does that say about your country?

Sure, make a little lecture about discipline, living in your means, or getting a third job. But just contemplate the sheer scope of it.

The human ability to ignore or rationalize so much suffering and struggle by others is truly remarkable.

Interesting question.

Looks to total $46 billion, which equates to about $139 dollars per man, woman, and child in the US.

The default rate is approximately 6% on pay day loans.

So not sure what your point is, looks like people use them for emergencies and pay them off 94% of the time. I don’t know what that “says about [our] country” exactly. That we have liquid credit markets for the poor?

I mean, you could argue for a wage subsidy.

Why would you spread it across the entire US? That was rather generous to yourself.

One number I saw was 12 million people use the loans. No college degree, making less than $25k, mostly african american, renters, etc. That's $3,800 per. Which might be as much as 25% of their annual income.

Using the numbers above, that translates to $57 in fees for the average user. Not a lot to get upset about.

Nothing to see here. Fake news. Everyone is doing great and very happy.

First sign that McMike is self-aware

Per capita gives you an easy way to estimate the magnitude of the industry.

By the way, your math isn’t even close to reality.

Average payday loan: $392
Median: $350

So for An average loan...$30 to $90 in interest.

My policy preference would be a wage subsidy. I would even support a deposit of $1,000 in a bank account each newborn American.

But if you’d like to start a nonprofit that loans money at zero percent interest I’d love to hear the results. Our local church is heavily involved in solving these short term poverty liquidity crises. I’m sure it’s not the only one.

I am not aiming to estimate the size of the industry, but the magnitude of poverty, and the mechanisms that worsen, trap, and prey on them.

Yes, to my question, a living wage for anyone wiling to show up and work, however derived, would be a good start.

How should people reach out to you for these job opportunities you have?

Well the magnitude of poverty is about 5% of the population, post-transfers, and even those in poverty live a pretty comfortable life compared to people say a hundred years ago. Hopefully we can improve thing yet more, but we won't do it by banning credit which actually helps poor people get through emergencies, or by mandating a wage above the market-clearing level. And as for "third jobs" presumably you know that the rich work much more than the poor in the U.S.

The best thing we could do to alleviate poverty would be to loosen anti-competitive business regulations (not talking environmental regs here, but stupid stuff that's unjustifiable) and licensing requirements, promote trades, improve the tax system. A wage subsidy would be a lot more effective than a high minimum wage.

"so much suffering and struggle"...

Compared to what? Welcome to Earth, and congratulations, you drew 21st century American, considered the golden ticket by billions of Earthlings.

You are clearly concerned, so give all that you can.

"What does that say about your country?"

More importantly, what does it say about you? Did anyone bother to ask regular users of payday loans if they'd like that option wiped off the planet, or is the desire to regulate simply to make you feel good about yourself?

>What does that say about your country?

That we're totally happy giving literally anyone free stuff, and protecting them with extremely forgiving bankruptcy laws, as long as they keep voting Dem.

Thanks for asking!

"Forgiving bankruptcy." You might need to get out of your mom's basement and take a walk.

Are you denying the existence of bankruptcy? Are you claiming the work houses are still in existence?

What happens to them if they can't pay back the loan? Wages could be garnished but only a modest %. Presumably they don't have assets they could lose in bankruptcy.

Well, people who ignore court orders to pay their debts can be sent to jail for contempt. And bankruptcy costs money to file. The poor very often cannot afford it.

I think I farted again!

farting is overvalued unless a swan is involved .

Virginia killed payday loans, but now there's a car title lender on every corner.

Well, at least Virginia provides the legal framework for such an industry to exist in the first place. And considering that this is basically the most predatory form of borrowing outside of a loan shark in terms of destroying someone's ability to drive to work, that it is available in Virginia is no surprise.

Would like to see more defense of payday lending not on utilitarian terms (i.e. they turn to worse alternatives if banned), but on moral terms and the preservation of the freedom of the consumer.

Regardless of what consumers would do in the absence of legal payday loans, that decision is entirely theirs to make! There are countless bad decisions that people make with their money or otherwise, yet these are not outlawed. Financing a new car, running a credit card balance to pay for consumption items, failing to contribute to retirement, etc. These are all terrible financial decisions, just on an order of magnitude less than getting a payday loan, and could be arguably banned using the same exact logic of banning payday lending. But they're not, and its generally accepted that while it may be stupid to do those things, that is not the decision of government to make on behalf of its citizens, but lies solely within the province of the individual decision maker, as it is purely a private affair of spending ones own money and does not involve any third party harm.

In some cases, its the government that actively encourages these bad decisions - 44 states have lotteries.

"A 2011 paper in the Journal of Gambling Studies conducts a thorough review of the available research on lotteries and concludes that the “poor are still the leading patron of the lottery and even the people who were made to feel poor buy lotteries. The legalization of gambling has seen a significant increase of young people gambling, particularly in lotteries ...”

A 2016 study in the same journal reports that more people have gambling problems in states with more types of legal gambling or where gambling has been legal for longer.

Moreover, other studies, such as a 2010 paper in the Journal of Community Psychology, find that lottery outlets are often clustered in neighborhoods with large numbers of minorities, who are at greatest risk for developing gambling addictions.

https://www.gamblingsites.com/state-lotteries/

https://journalistsresource.org/studies/economics/personal-finance/research-review-lotteries-demographics/

"44 states have lotteries"

They don't just have lotteries, they ban all competing lotteries, offer a rate of return far below that of casino gambling, and advertise the heck out of their crappy monopoly products.

One of the more depressing areas of today's industrial organization economics is a subset called Behavioral Industrial Organization. (BEIO)

What some of the research reveals is that if you increase the supply of, say, payday lenders, what happens is that the increased competition causes the lenders to find even more ways to attract the uninformed or to fleece them. Think of it as product differentiation. So, one effect is that terms of the loan (duration, default, etc.) change when fees are capped, or when there are more entrants.

There is no limit on the way that businesses can attract the gullible, and pick their pockets.

I'm not understanding why we're supposed to be distressed that people seeking microcredit switch from the pay-day lending hamster wheel to conventional microcredit in the form of collateralized loans.

Remember the low hanging fruit for helping the poor is to halve the States take of the lottery, and eliminate taxes on cigarettes and booze. The thing about the poor is they have no money.

Rumor has it that Raymond Patriaca's successor is a big supporter of laws making payday loans illegal.

That would be, Carmen Dinunzio and by Matthew Guglielmetti.
The name had escaped me.

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