Understanding Payday Loans
Economic and Social Benefits of Payday Lending
A great deal of confusion and misunderstanding surrounds payday lending. From outside the industry, critics see high Annual Percentage Rates (APR) and deduce that payday lenders profit abnormally from predatory¹ lending practices at the expense of consumer welfare. As the founders of Australia¹s largest and most popular online payday lender, Cash Doctors, we will share some of our experiences and insights and reveal exactly why this view has no commercial or theoretical basis.
In Defense of Payday Lending
Published in 2003 by the Ludwig von Mises Institute, an economic think tank in the USA, "In Defense of Payday Lending" sheds some light on the economic reality behind the payday lending industry. The essay makes a convincing case for less industry regulation while taking critics to task over the welfare of people in a regulated environment. Tom Lehman is assistant professor of economics at Indiana Wesleyan University.
Defining and Detecting Predatory Lending
Donald P. Morgan, Research Officer, Federal Reserve Bank of New York, and Samuel G. Hanson, Graduate Student, Harvard Business School. Concludes that payday loans are not a "welfare reducing" form of credit. To the contrary, the authors suggest that payday lenders enhance the welfare of households by increasing the supply of credit. They examined differences in household debt and delinquency across states that allow payday lending and those that do not and compared the change in those differences before and after the advent of payday lending.
Payday Holiday: How Households Fare after Payday Credit Bans
Donald Morgan and Michael Strain from the Federal Reserve Bank of New York, recently published results of research into how households fare after payday lending bans. Morgan and Strain found that households in Georgia and North Carolina, where payday lending is banned, have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate than households in states that permitted payday lending. This negative correlation reduced payday credit supply, increased credit problems contradicts the debt trap critique of payday lending.
