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Payday Lending: A Business Model that Encourages Chronic Borrowing

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  • Michael A. Stegman
  • Robert Faris

Abstract

The tremendous growth in the demand for very small, short-term loans by credit constrained households is being largely filled by companies offering payday loans. This article explores the explosive growth of payday lending as a source of short-term consumer credit in low- and moderate-income communities, with a special emphasis on the relationship between industry business practices and the high incidence of perpetual indebtedness in which an increasing number of payday borrowers find themselves. Empirical analysis confirms two related truths about payday lending. First, there is no denying the large and growing demand for this consumer credit and the rapidly expanding network of companies willing to supply it. Second, despite its expanding customer base and notwithstanding industry denials, the financial performance of the payday loan industry, at least in North Carolina, is significantly enhanced by the successful conversion of more and more occasional users into chronic borrowers.

Suggested Citation

  • Michael A. Stegman & Robert Faris, 2003. "Payday Lending: A Business Model that Encourages Chronic Borrowing," Economic Development Quarterly, , vol. 17(1), pages 8-32, February.
  • Handle: RePEc:sae:ecdequ:v:17:y:2003:i:1:p:8-32
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    Cited by:

    1. Marion Fourcade & Kieran Healy, 2013. "Classification situations: Life-chances in the neoliberal era," Sciences Po publications info:hdl:2441/6cbt691h0h8, Sciences Po.
    2. Melzer, Brian T. & Morgan, Donald P., 2015. "Competition in a consumer loan market: Payday loans and overdraft credit," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 25-44.
    3. Matthias Keese, 2009. "Triggers and Determinants of Severe Household Indebtedness in Germany," Ruhr Economic Papers 0150, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Irwan Trinugroho & Agusman Agusman & Mochammad Doddy Ariefianto & Darsono Darsono & Amine Tarazi, 2015. "Determinants of cross regional disparity in financial deepening: Evidence from Indonesian provinces," Economics Bulletin, AccessEcon, vol. 35(2), pages 896-910.
    5. Snarr, Hal W. & Burkey, Mark L., 2006. "A Preliminary Investigation of Welfare Migration Induced by Time Limits," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 36(2), pages 1-16.
    6. John Y. Campbell & Howell E. Jackson & Brigitte C. Madrian & Peter Tufano, 2011. "Consumer Financial Protection," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 91-114, Winter.
    7. Clinton Key & Jenna N. Tucker & Michal Grinstein-Weiss & Krista Comer, 2015. "Tax-Time Savings among Low-Income Households in the $aveNYC Program," Journal of Consumer Affairs, Wiley Blackwell, vol. 49(3), pages 489-518, November.
    8. Campbell, John Y. & Jackson, Howell E. & Madrian, Brigitte C. & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Working Paper Series rwp10-040, Harvard University, John F. Kennedy School of Government.
    9. Taylor Canann & Richard Evans, 2015. "Determinants of Short-term Lender Location and Interest Rates," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(3), pages 235-262, December.
    10. repec:eee:aumajo:v:19:y:2011:i:3:p:203-211 is not listed on IDEAS
    11. James Barth & Jitka Hilliard & John Jahera, 2015. "Banks and Payday Lenders: Friends or Foes?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 21(2), pages 139-153, May.
    12. Anping Chen & Marlon Boarnet & Mark Partridge & Christopher S. Fowler & Jane K. Cover & Rachel Garshick Kleit, 2014. "The Geography Of Fringe Banking," Journal of Regional Science, Wiley Blackwell, vol. 54(4), pages 688-710, September.
    13. 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.
    14. Heather Boushey & Christian E. Weller, 2006. "Inequality and Household Economic Hardship in the United States of America," Working Papers 18, United Nations, Department of Economics and Social Affairs.
    15. Kabir Dasgupta & Brenden J. Mason, 2019. "The Effect of Interest Rate Caps on Bankruptcy: Synthetic Control Evidence from Recent Payday Lending Bans," Working Papers 2019-04, Auckland University of Technology, Department of Economics.
    16. Raccanello, Kristiano & Romero-García, David Arturo, 2012. "Prácticas predatorias y crédito al consumidor," eseconomía, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(36), pages 7-43, cuarto tr.
    17. Fourcade, Marion & Healy, Kieran, 2013. "Classification situations: Life-chances in the neoliberal era," Accounting, Organizations and Society, Elsevier, vol. 38(8), pages 559-572.
    18. repec:zbw:rwirep:0150 is not listed on IDEAS
    19. Keese, Matthias, 2009. "Triggers and Determinants of Severe Household Indebtedness in Germany," Ruhr Economic Papers 150, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    20. repec:kap:iaecre:v:21:y:2015:i:2:p:139-153 is not listed on IDEAS
    21. Joseph Persky, 2007. "Retrospectives: From Usury to Interest," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 227-236, Winter.
    22. repec:spr:empeco:v:56:y:2019:i:3:d:10.1007_s00181-018-1447-2 is not listed on IDEAS
    23. Barth, James R. & Hilliard, Jitka & Jahera, John S. & Sun, Yanfei, 2016. "Do state regulations affect payday lender concentration?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 14-29.
    24. Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
    25. Agarwal, Sumit & Gross, Tal & Mazumder, Bhashkar, 2016. "How Did the Great Recession Affect Payday Loans?," Economic Perspectives, Federal Reserve Bank of Chicago, issue 2, pages 1-12.

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