Payday loan regulations
Payday loans are small, short-term loans that carry high fees, with consumers providing either a personal check to be cashed later or electronic access to a checking account1. Payday loans are offered by specialized companies, instead of banks or credit unions; these companies may have brick and mortar storefronts or be online2, 3. Payday loan regulations can include caps on maximum interest rates, limit the dollar amount and number of loans approved for an individual, or complete bans on payday loan distribution in the state4, 5. Regulations may also include minimum loan term requirements and credit costs6.
What could this strategy improve?
Expected Benefits
Our evidence rating is based on the likelihood of achieving these outcomes:
Increased financial stability
What does the research say about effectiveness?
There is mixed evidence about the effects payday loan regulations have on the financial stability of individuals in the communities where they are implemented. Some studies suggest that payday loan bans, caps, and consumer education on the true costs of the loans may reduce high interest borrowing, including payday loans6, 7, 8, 9, 10 and tax refund anticipation loans5, as well as use of other high cost, short-term credit resources such as pawn shops6,9. However, other studies suggest payday loan regulations may shift high interest borrowing to other predatory lenders such as pawnshop brokers, precious metal dealers, small loan lenders, and second mortgage lenders3, 11.
The financial impact of bans and regulations on individuals is mixed. One Georgia-based study suggests that payday loan bans may reduce involuntary bank account closures12, while a nationwide study indicates that there may be an increase11. A study of state-level payday loan bans suggests bankruptcies are reduced when regulations are in place13, while another study among states with interest rate caps found no impact, positive or negative, on bankruptcies8. Impacts on loan defaults are also inconsistent, as there is evidence that payday loan regulations both increase14 and decrease defaults15 and have minimal impacts on delinquencies16. Access to payday loans does not appear to impact credit scores and balances17, 18, 19 or labor outcomes17.
Payday loan access may increase financial hardship in some circumstances but may alleviate it in others20, 21, 22, 23, 24. For example, access to payday loans may increase funds to purchase food and increase food security for adults at risk of food insecurity25. Bans and caps may limit access to credit in emergencies, increasing the number of bounced checks, overdraft fees, and bills paid late9, 13, 26. One study suggests loan caps may lead consumers to apply for multiple loans to obtain similar amounts of funds4.
Payday loan regulations in one state may increase the concentration of payday lenders in bordering out-of-state counties27. Payday loan bans are also associated with reduced overdraft credit limits and prices from banks and credit unions, who may take less risk and bounce checks that would have otherwise been covered28.
In response to payday loan regulations, alternative sources of short-term, high-interest, and small-dollar credit loans are on the rise, including small-dollar loans, unsecured credit cards, and earned wage advances2. Payday loans are high cost and, with fees averaging $15-$30 per $100 borrowed29 are often considered a form of predatory lending30, 31. However, many middle- and low-income families32 and persons with disabilities access payday loans33, often as a last resort once credit card lines are exhausted18. Black households are more than twice as likely to access payday loans, as marginalized populations have historically been left behind by mainstream lenders and financial service providers30. Payday lenders are more concentrated in states with areas of high poverty and higher percentages of residents who are Black34. Payday loans and related regulations may disproportionately increase financial barriers for women of color35.
Payday loan regulations may decrease liquor sales36 and property crime20.
How could this strategy advance health equity? This strategy is rated potential for mixed impact on disparities: suggested by expert opinion.
Payday loan regulations have mixed impacts on disparities in financial stability between families with high and low incomes32 and between Black and white households30. Although payday loan regulations may reduce high interest borrowing6, 7, 8, 9, 10, regulations may also reduce access to credit for those who have no other options18. Some studies suggest that regulating payday loans may cause borrowers to shift to other predatory lenders like pawnshop brokers, precious metal dealers, small loan lenders, and second mortgage lenders3, 11. Payday loan regulations may disproportionately impact Black households, which are more than twice as likely to access payday loans than white households due to historically being left behind by mainstream lenders and financial service providers30. Payday lenders are more concentrated in areas with high poverty and high percentages of residents who are Black34. There is limited evidence to suggest that payday loans and related regulations may disproportionately increase financial barriers for women of color35.
What is the relevant historical background?
Payday loan-style lending emerged more than a century ago, before consumer credit existed. This industry was initiated by illegal “salary lenders” offering one-week, cash loans with high interest rates to borrowers. Lenders often used public embarrassment or the threat of job loss to secure repayments. In 1916, the first Uniform Small Loan Law was adopted to create a legal market, permitting loans of $300 or less with a monthly interest rate of up to 3.5%. The Uniform Small Loan Law was effectively the first payday loan regulation, while it laid the groundwork for the eventual expansion of consumer credit, including the availability of mortgages and credit cards38. Today payday loans are short-term, high interest loans, generally due on the borrower’s next payday39. Despite excessive costs, payday loans have become increasingly popular; the number of payday loan retailers doubled between 2000 and 201011. Federal regulations require disclosure of fees and payments and rate caps in some instances40, 41. Specific regulations vary by state1.
Equity Considerations
- Where are payday loan retailers located in your community? What does the geographical distribution look like and who lives near the retailers?
- Who uses payday loan services in your community? What are the underlying reasons why individuals are seeking payday loans (e.g., poor credit, low-wage jobs, etc.)?
- If regulations limit the availability of payday loans, what other strategies can you implement to ensure individuals have access to non-predatory forms of credit?
Implementation Examples
Payday loan regulations vary by state. As of 2020, 37 states specifically allow payday lending, while 7 states, Guam, Puerto Rico, and the U.S. Virgin Islands do not have specific payday lending statutes1. Arizona and North Carolina allowed preexisting payday lending statutes to sunset, and Arkansas, New Mexico, and Washington, D.C. have repealed existing statutes1.
Campaigns to curb payday lending have been documented in Salt Lake County, Utah; Dallas, Denton, and Tarrant counties in Texas; and Santa Clara and San Mateo counties in California37.
Implementation Resources
‡ Resources with a focus on equity.
CRL - Center for Responsible Lending (CRL). State of lending: Payday loans.
NCSL-Payday lending statutes - National Conference of State Legislatures (NCSL). Payday lending statutes.
Footnotes
* Journal subscription may be required for access.
1 NCSL-Payday lending statutes - National Conference of State Legislatures (NCSL). Payday lending statutes.
2 Malone 2020 - Malone C, Skiba PM. Regulation and recent trends in high-interest credit markets. Annual Review of Law and Social Science. 2020;16:311-326.
3 Ramirez 2019a - Ramirez SR. Payday-loan bans: Evidence of indirect effects on supply. Empirical Economics. 2019;56:1011-1037.
4 Miller 2021 - Miller T, Zywicki TJ. The effects on consumers from two state-level regulations of the payday loan market. SSRN Electronic Journal. 2021.
5 FRB-Galperin 2014 - Galperin RV, Weaver A. Payday lending regulation and the demand for alternative financial services. Federal Reserve Bank of Boston. 2014: Community Development Discussion Paper No. 2014-1.
6 McKernan 2013 - McKernan S-M, Ratcliffe C, Kuehn D. Prohibitions, price caps, and disclosures: A look at state policies and alternative financial product use. Journal of Economic Behavior & Organization. 2013;95:207-23.
7 NBER-Wang 2021 - Wang J, Burke K. The effects of disclosure and enforcement on payday lending in Texas. National Bureau of Economic Research (NBER). 2021: Working Paper 28765.
8 Dasgupta 2020 - Dasgupta K, Mason BJ. The effect of interest rate caps on bankruptcy: Synthetic control evidence from recent payday lending bans. Journal of Banking and Finance. 2020;119:105917.
9 Zinman 2010 - Zinman J. Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap. Journal of Banking & Finance. 2010;34(3):546-56.
10 Bertrand 2011 - Bertrand M, Morse A. Information disclosure, cognitive biases, and payday borrowing. Journal of Finance. 2011;66(6):1865-93.
11 Bhutta 2016 - Bhutta N, Goldin J, Homonoff T. Consumer borrowing after payday loan bans. Journal of Law and Economics. 2016;59(1):225-259.
12 Campbell 2012 - Campbell D, Asís Martínez-Jerez F, Tufano P. Bouncing out of the banking system: An empirical analysis of involuntary bank account closures. Journal of Banking & Finance. 2012;36(4):1224-35.
13 Morgan 2012 - Morgan DP, Strain MR, Seblani I. How payday credit access affects overdrafts and other outcomes. Journal of Money, Credit and Banking. 2012;44(2-3):519-31.
14 Fekrazad 2020 - Fekrazad A. Impacts of interest rate caps on the payday loan market: Evidence from Rhode Island. Journal of Banking and Finance. 2020;113:105750.
15 Pew-Payday lending 2014 - The Pew Charitable Trusts (Pew). Trial, error, and success in Colorado’s payday lending reforms. Philadelphia: The Pew Charitable Trusts; 2014.
16 Desai 2017 - Desai CA, Elliehausen G. The effect of state bans of payday lending on consumer credit delinquencies. Quarterly Review of Economics and Finance. 2017;64:94-107.
17 Carter 2017a - Carter SP, Skimmyhorn W. Much ado about nothing? New evidence on the effects of payday lending on military members. Review of Economics and Statistics. 2017;99(4):606-621.
18 Bhutta 2015 - Bhutta N, Skiba PM, Tobacman J. Payday loan choices and consequences. Journal of Money, Credit and Banking. 2015;47(2-3):223-260.
19 Bhutta 2013 - Bhutta N. Payday loans and consumer financial health. Division of Research & Statistics and Monetary Affairs, Federal Reserve Board. 2013: Finance and Economics Discussion Series, Working Paper 2013-81.
20 Barth 2020 - Barth JR, Hilliard J, Jahera JS, Lee KB, Sun Y. Payday lending, crime, and bankruptcy: Is there a connection? Journal of Consumer Affairs. 2020;54(4):1159-1177.
21 Anderson 2018a - Anderson MH, Jackson R. Evaluating options for the regulation of payday loans. Journal of Applied Business Research. 2018;34(1):131-142.
22 NBER-Zinman 2013 - Zinman J. Consumer credit: Too much or too little (or just right)? National Bureau of Economic Research (NBER); 2013: Working Paper 19682.
23 Morse 2011 - Morse A. Payday lenders: Heroes or villains? Journal of Financial Economics. 2011;102(1):28-44.
24 Melzer 2011 - Melzer BT. The real costs of credit access: Evidence from the payday lending market. Quarterly Journal of Economics. 2011;126(1):517-55.
25 Fitzpatrick 2014 - Fitzpatrick K, Coleman-Jensen A. Food on the fringe: Food insecurity and the use of payday loans. Social Service Review. 2014;88(4):553-593.
26 Urban-McKernan 2015 - McKernan SM, Ratcliffe C, Quakenbush C. Small-dollar credit: Protecting consumers and fostering innovation. Washington, D.C.: Urban Institute; 2015.
27 Ramirez 2020a - Ramirez SR. Regulation and the payday lending industry. Contemporary Economic Policy. 2020;38(4):675-693.
28 Melzer 2015 - Melzer BT, Morgan DP. Competition in a consumer loan market: Payday loans and overdraft credit. Journal of Financial Intermediation. 2015;24(1):25-44.
29 Stegman 2007 - Stegman MA. Payday lending. Journal of Economic Perspectives. 2007;21(1):169-90.
30 Charron-Chenier 2020 - Charron-Chénier R. Predatory inclusion in consumer credit: Explaining Black and white disparities in payday loan use. Sociological Forum. 2020;35(2):370-392.
31 Lee 2018d - Lee J, Kim KT. The increase in payday loans and damaged credit after the Great Recession. Journal of Family and Economic Issues. 2018;39(2):360-369.
32 Lim 2014 - Lim Y, Bickham T, Broussard J, et al. The role of middle-class status in payday loan borrowing: A multivariate approach. Social Work. 2014;59(4):329-337.
33 McGarity 2019 - McGarity SV, Caplan MA. Living outside the financial mainstream: Alternative financial service use among people with disabilities. Journal of Poverty. 2019;23(4):317-335.
34 Barth 2015 - Barth JR, Hilliard J, Jahera JS Jr. Banks and payday lenders: Friends or foes? International Advances in Economic Research. 2015;21:139-153.
35 Kerby 2013 - Kerby S. How pay inequity hurts women of color. 2013.
36 Cuffe 2015 - Cuffe HE, Gibbs CG. The effect of payday lending restrictions on liquor sales. Journal of Banking and Finance. 2015; 85:132-145.
37 Mayer 2017 - Mayer RN, Martin N. The power of community action: Anti-payday loan ordinances in three metropolitan areas. SSRN Electronic Journal. 2017.
38 Pew-Payday lending law 2012 - The Pew Charitable Trusts (Pew). A short history of payday lending law. 2012.
39 FTC-Payday lending - Federal Trade Comission (FTC). Payday lending.
40 HR 4173 - 111th Congress 2009-2010. House of Representatives (HR) 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act.
41 US Treasury-Truth in Lending Act - U.S. Department of the Treasury (U.S. Treasury). Office of the Comptroller of the Currency (OCC). Truth in Lending.
Related What Works for Health Strategies
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