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Determinants of Short-term Consumer Lending Interest Rates


  • Richard W. Evans

    () (Department of Economics, Brigham Young University)


One 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.

Suggested Citation

  • Richard W. Evans, 2012. "Determinants of Short-term Consumer Lending Interest Rates," BYU Macroeconomics and Computational Laboratory Working Paper Series 2012-07, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  • Handle: RePEc:byu:byumcl:201207

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    References listed on IDEAS

    1. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-417, May.
    2. Burkey, Mark L. & Simkins, Scott P., 2004. "Factors Affecting the Location of Payday Lending and Traditional Banking Services in North Carolina," The Review of Regional Studies, Southern Regional Science Association, vol. 34(2), pages 191-205.
    3. H. Damar, 2009. "Why Do Payday Lenders Enter Local Markets? Evidence from Oregon," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(2), pages 173-191, March.
    4. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    5. Scott Carrell & Jonathan Zinman, 2014. "In Harm's Way? Payday Loan Access and Military Personnel Performance," Review of Financial Studies, Society for Financial Studies, vol. 27(9), pages 2805-2840.
    6. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
    7. Charles Calomiris & Thanavut Pornrojnangkool, 2009. "Relationship Banking and the Pricing of Financial Services," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(3), pages 189-224, June.
    8. Edward C. Lawrence & Gregory Elliehausen, 2008. "A Comparative Analysis Of Payday Loan Customers," Contemporary Economic Policy, Western Economic Association International, vol. 26(2), pages 299-316, April.
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    More about this item


    Consumer lending; interest rates; payday lenders;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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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