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Consumer Borrowing after Cash Advance Bans

Consumer Borrowing after Cash Advance Bans

Federal Reserve Board

Stanford Law Class


High-interest payday loans have actually proliferated in the past few years; therefore too have efforts to control them. Yet exactly how borrowers react to such regulations stays mostly unknown. Drawing on both administrative and survey information, we exploit variation in payday-lending regulations to examine the result of cash advance limitations on customer borrowing. We find that although such policies work well at reducing payday financing, customers react by moving to many other types of high-interest credit (as an example, pawnshop loans) as opposed to conventional credit instruments (as an example, bank cards). Such moving exists, but less pronounced, when it comes to lowest-income pay day loan users. Our outcomes declare that policies that target payday lending in isolation might be inadequate at reducing customers’ reliance on high-interest credit.

1. Introduction

The payday-lending industry has gotten extensive attention and intense scrutiny in modern times. Payday loans—so called because that loan is normally due in the date associated with the borrower’s next paycheck—are typically very costly. The percentage that is annual (APR) associated with such loans commonly reaches triple digits. Despite their price, payday advances have actually skyrocketed in appeal considering that the 1990s, using the amount of pay day loan shops significantly more than doubling between 2000 and 2004. (more…)