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Consumer Borrowing after Cash Advance Bans

Consumer Borrowing after Cash Advance Bans

Federal Reserve Board

Stanford Law Class

Abstract

High-interest payday loans have proliferated in the past few years; therefore too have efforts to manage them. Yet exactly just exactly how borrowers react to regulations that are such mainly unknown. Drawing on both administrative and survey information, we exploit variation in payday-lending legislation to analyze the consequence of pay day loan limitations on customer borrowing. We discover that although such policies work well at reducing payday lending, customers react by moving to many other kinds of high-interest credit (as an example, pawnshop loans) instead of conventional credit instruments (for instance, bank cards). Such shifting exists, but less pronounced, when it comes to lowest-income pay day loan users. Our outcomes claim that policies that target payday financing in isolation might be inadequate at reducing customers’ reliance on high-interest credit.

1. Introduction

The payday-lending industry has gotten attention that is widespread intense scrutiny in the last few years. Payday loans—so called because that loan is typically due in the date of this borrower’s paycheck—are that is next pricey. The annual percentage rate (APR) associated with such loans commonly reaches triple digits. Despite their expense, pay day loans have actually skyrocketed in appeal considering that the 1990s, utilizing the wide range of pay day loan shops a lot more than doubling between 2000 and 2004. At the time of 2010, there were more cash advance stores in america than there were Starbucks and McDonald’s locations combined (Skiba and Tobacman 2009).

Due to their high rates of interest, many criticize pay day loans as predatory financing. Payday loan providers, critics allege, target low-income borrowers who will be therefore eager for funds that they’re prepared to spend interest that is exorbitant. Continue reading Consumer Borrowing after Cash Advance Bans