Determinants of Short-term Consumer Lending Interest Rates
AbstractOne of the most striking characteristics of the short-term consumer lending industry is the high level of interest rates. This study tests a theory of consumer lending interest rates in which fixed processing costs of short-term loans are the main determinant of interest-rate levels. I perform empirical tests using store-level data from payday and title lenders in the State of Utah from 2010, combined with zip-code level socioeconomic data from the U.S. Census Bureau and the Internal Revenue Service representing potential borrowers. I find that competition among lenders reduces average interest rates and that riskiness of borrowers, as measured by defaults, increases average interest rates. I also fnd that short-term consumer interest rates have a nonlinear and significant relationship to average income, consistent with anecdotal evidence from the payday lending industry but inconsistent with the hypothesis that short-term consumer lenders prey upon the poor. Lastly, I find no evidence that race or eduction affect the short-term lenders' interest rates.
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Bibliographic InfoPaper provided by Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory in its series BYU Macroeconomics and Computational Laboratory Working Paper Series with number 2012-07.
Length: 32 pages
Date of creation: Aug 2012
Date of revision:
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Consumer lending; interest rates; payday lenders;
Find related papers by JEL classification:
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
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