NCPA - National Center for Policy Analysis

Are Payday Lending Markets Competitive?

October 12, 2012

Payday lenders are a popular avenue for people to get a quick loan when strapped for cash. Recent policy discussions have accused payday lenders of usury, which cause many individuals to default. However, borrowers find that obtaining loans from payday lenders are more convenient and cheaper than the alternative of getting them from credit union or banks, says Victor Stango, an associate professor in the Graduate School of Management at the University of California, Davis.

Many people find payday lenders simpler to use for a variety of reasons:

  • Credit unions have locations and hours that are far less convenient.
  • Additionally, application times are longer at credit unions and banks than at a commercial payday lender.
  • Moreover, a borrower doesn't risk hurting their credit score for defaulting on a loan from a payday lender.
  • Finally, consumers cite privacy as a main reason why they choose payday lenders over other methods of getting loans.

Payday lenders are not usurious. On the contrary, payday lenders offer loans that are cost-competitive with those from credit unions and banks. The full set of costs associated with loans include fixed costs, as well as processing costs such as labor and any costs associated with credit scoring. And since payday lenders have fewer requirements for giving out loans, there is a higher risk of people defaulting.

Proponents of placing a cap on rates and fees for payday lenders argue that it is a necessary measure to prevent usury. However, given the business model of payday lenders, the imposition of further caps would force lenders out of business.

In addition, those proponents argue that credit unions and banks would be able to fill in the role that payday lenders play but at a much cheaper rate. But data collected in 2009 shows that only 6 percent of credit unions give out payday loans in the first place. Furthermore, credit unions offer cheaper rates solely because they only give loans to individuals that have a low risk in defaulting on their loans.

Source: Victor Stango, "Are Payday Lending Markets Competitive?" Regulation, Fall 2012.


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