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Determinants of Short-term Lender Location and Interest Rates

  • Taylor J. Canann

    (Department of Economics, Brigham Young University)

  • Richard W. Evans

    (Department of Economics, Brigham Young University)

This study tests the degree to which payday and title lenders differentiate their store location and interest rates based on the socioeconomic characteristics of the areas in which they operate. We use store-level lender data, geographically matched IRS income data, and Census Bureau demographic data to answer these questions. In the case of lender location, we find that payday and title lenders tend to locate in areas with lower median age, a larger population of not married households, more restaurants, and more pawn shops. We also find a nonlinear relationship between lender location and individual incomes in the surrounding area. Regarding lender interest rates, we find that competition among lenders reduces average interest rates and that riskiness of borrowers, as measured by defaults, increases average interest rates. We also find that payday and title lenders have higher interest rates in areas with lower educational attainment, smaller proportions of Black residents, and fewer married households. This evidence seems to contradict the argument that payday and title lenders prey on minorities.

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Paper 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 2013-06.

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Length: 37 pages
Date of creation: Dec 2013
Date of revision:
Publication status: Published in Journal of Financial Services Research, forthcoming
Handle: RePEc:byu:byumcl:201306
Contact details of provider: Postal: 130 Faculty Office Building, P.O. Box 22363, Brigham Young University, Provo, Utah 84602
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  1. Cameron,A. Colin & Trivedi,Pravin K., 2013. "Regression Analysis of Count Data," Cambridge Books, Cambridge University Press, number 9781107667273, October.
  2. Donald P. Morgan & Michael R. Strain & Ihab Seblani, 2012. "How Payday Credit Access Affects Overdrafts and Other Outcomes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 519-531, 03.
  3. Charles Calomiris & Thanavut Pornrojnangkool, 2009. "Relationship Banking and the Pricing of Financial Services," Journal of Financial Services Research, Springer, vol. 35(3), pages 189-224, June.
  4. Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
  5. Burkey, Mark L. & Simkins, Scott P., 2004. "Factors affecting the location of payday lending and traditional banking services in North Carolina," MPRA Paper 36043, University Library of Munich, Germany.
  6. Robert DeYoung & Ronnie J. Phillips, 2009. "Payday loan pricing," Research Working Paper RWP 09-07, Federal Reserve Bank of Kansas City.
  7. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, vol. 102(1), pages 28-44, October.
  8. Scott Carrell & Jonathan Zinman, 2008. "In harm’s way? Payday loan access and military personnel performance," Working Papers 08-18, Federal Reserve Bank of Philadelphia.
  9. H. Damar, 2009. "Why Do Payday Lenders Enter Local Markets? Evidence from Oregon," Review of Industrial Organization, Springer, vol. 34(2), pages 173-191, March.
  10. 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.
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