1 Introduction
More than two full decades after its emergence, payday lending remains a divisive issue for economists and policymakers.
No consensus has been reached on whether the use of these high-cost, short-term balloon loans is better for consumers or actually makes their situation worse. Advocates point to situations where payday loans appear to be a person’s best option. For example, if unexpected medical expenses leave a family short on cash to pay their bills, a payday loan might be better than having their electricity shut off and having to pay the reconnection fee. Alternative sources of funds may be unavailable in an emergency (for example, credit cards may be maxed out) or more expensive than payday loans (as are overdraft fees at many banks). Research such as that by Morgan and Strain (2008), Elliehausen (2009), Fusaro and Cirillo (2011), and Morse (2011) has supported the idea that access to payday lending improves welfare.
But, opponents of payday financing mention that customers rarely report borrowing in response to such crisis situations. Pew Charitable Trusts (2012) discovers that just 16% of payday clients took away their initial loan as a result to a unanticipated cost, while 69% reported borrowing to pay for a recurring cost such as for instance rent or food. (more…)