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Could restrictions on payday lending hurt consumers?

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  • Kelly D. Edmiston

Abstract

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 percent 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.” Debt spirals arise from repeated payday borrowing, using new loans to pay off old ones, and often paying many times the original loan amount in interest. ; In the wake of the 2008 financial crisis, many policymakers are considering strengthening consumer protections on payday lending. Yet few studies have focused on any unintended consequences of restricting such lending. Thus, the question arises: Could restrictions on payday lending have adverse effects? ; Edmiston examines payday lending and provides new empirical evidence on how restrictions could affect consumers. His analysis shows that restrictions could deny some consumers access to credit, limit their ability to maintain formal credit standing, or force them to seek more costly credit alternatives. Thus, any policy decisions to restrict payday lending should weigh these potential costs against the potential benefits.

Suggested Citation

  • Kelly D. Edmiston, 2011. "Could restrictions on payday lending hurt consumers?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I.
  • Handle: RePEc:fip:fedker:y:2011:i:qi:n:v.96no.1:x:2
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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/11q1Edmiston.pdf
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    References listed on IDEAS

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    1. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Review of Financial Studies, Society for Financial Studies, pages 433-464.
    2. Robert DeYoung & Ronnie J. Phillips, 2009. "Payday loan pricing," Research Working Paper RWP 09-07, Federal Reserve Bank of Kansas City.
    3. Wilson Bart J & Findlay David W. & Meehan James W. & Wellford Charissa & Schurter Karl, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, October.
    4. Paige M. Skiba & Jeremy Tobacman, 2007. "Measuring the individual-level effects of access to credit: evidence from payday loans," Proceedings 1069, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Hayashi, Fumiko & Hanson, Josh & Maniff, Jesse Leigh, 2015. "Driver of choice? the cost of financial products for unbanked consumers," Research Working Paper RWP 15-15, Federal Reserve Bank of Kansas City.
    2. Kelly D. Edmiston, 2013. "The low- and moderate- income population in recession and recovery: results from a new survey," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 33-57.
    3. repec:eee:quaeco:v:64:y:2017:i:c:p:94-107 is not listed on IDEAS

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