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Ebook An Analysis Of Consumers’ Use Of Payday Loans

Submitted by wulan on Mon, 09/14/2009 - 03:32

Payday lending is a controversial segment of the consumer finance industry. A payday loan is a small, single payment loan that is repayable on the borrower’s next payday. Typically, payday loans are between $100 and $500 and have a term to maturity of about 14 days. Because of the small loan amount and short term to maturity, annual percentage rates for payday loans are commonly between 390 and 700 percent. Not surprisingly, the high annual percentage rates have led to allegations that payday loans are predatory. Industry critics often argue that the high interest charges and single payment feature of the product make repayment of the debt difficult, trapping many borrowers in a series of renewals that ultimately lead to insolvency. Payday lenders contend that the product satisfies credit constrained consumers’ liquidity needs for short term credit to manage unexpected expenses and shortfalls in cash. Although payday loans have a high price, the costs arising from delinquencies and late payments that such unexpected events could trigger may be even higher. These contentions need not be mutually exclusive. As with other credit products, some borrowers may have problems repaying while others are able to pay on time and receive benefits from the item being financed.

Historically, consumer finance companies provided small loans to relatively high risk, credit constrained consumers. Finance companies have largely abandoned the small loan market (Brito and Hartley 1995). Finance companies along with banks and credit unions prefer to provide access to such credit to more creditworthy consumers through revolving accounts. A notable characteristic that distinguishes payday loan customers from customers of other high price lenders such as pawnbrokers and rent to own companies is that all payday loan customers have a banking relationship. Payday loan customers must have a checking account to qualify for a payday loan, and most have an automobile loan or other type of consumer debt with a bank or finance company.

The modern payday loan industry developed during the 1990s. The industry originated as an innovation in the check cashing industry: The check cashing firm took the customer’s post dated personal check and agreed to defer cashing the check until a few days later (Mann and Hawkins 2007). The payday loan industry has grown considerably since its inception. The number of payday loan offices grew from under 200 offices in the early 1990s (Caskey 2001) to over 22,800 offices at the end of 2005 (Samolyk 2007). Check cashing companies remain a major source of payday loans, but pawnbrokers and monoline payday loan companies are also important sources of payday loans.

This monograph reviews existing evidence and presents new evidence on the economic and demographic characteristics of payday loan customers, their patterns of payday loan use, their understanding of payday loan costs and alternatives, and outcomes of payday loan use. This monograph seeks to assess whether payday loan customers know what they are doing when they use such credit and the extent to which payday loan credit benefits or harms consumers. Chapter I provides a brief description of the payday loan product, its costs, and regulation. Chapter II outlines economic and psychological models for consumer credit decisions. These models are the framework for analysis of the evidence on payday loan decisions. Chapter III describes new survey data. Chapter IV examines whether or not demographic and economic characteristics of payday loan customers are consistent with predictions from the economic model for consumer credit use. Chapter V examines payday loan customers’ most recent new payday loan transaction for evidence of whether or not customers’ decisions were purposive and intelligent. Chapter VI reviews evidence from previous studies that investigate whether or not consumers obtain any benefits from payday loans or whether or not payday loans lead to unsustainable levels of debt that end in default. Finally, Chapter VII provides a brief summary and conclusions.

CONTENTS

ACKNOWLEDGMENTS
EXECUTIVE SUMMARY
I. INTRODUCTION

    The Payday Loan Transaction
    Payday Loan Costs
    Regulation of Payday Lending
    State Laws
    Payday Loan Laws
    Payday Lending in States with Binding Rate Ceilings
    Payday Lending in Texas
    Federal Laws
    Self-Regulation

II. MODELS OF CONSUMER CREDIT BEHAVIOR

    The Economic Model of Consumer Credit Use
    The Consumption/Investment Model and Credit Demand
    Consumer Characteristics Associated with Credit Rationing
    New High-Cost Borrowing Opportunities for Rationed Consumers
    Is Use of High-Price Credit Ever Wealth Increasing?
    The Psychological Model of the Decision Process
    The Buyer-Behavior Model
    Problem Recognition
    Internal Search
    External Search
    Choice and Outcome Evaluation
    Information Processing in the Buyer Behavior Model
    Determinants of the Extent of the Decision Process
    Situational Factors
    Product Characteristics
    Consumer Characteristics
    Environmental Factors
    Hypotheses on the Extent of High-Price Credit Decisions
    Rationality and the Decision Process

III. DATA AND METHODOLOGY

    Data Collection
    Analysis

IV. ECONOMIC CHARACTERISTICS OF PAYDAY LOAN CUSTOMERS

    Income
    Age and Family Life-Cycle Stage
    Liquid Assets
    Credit Use
    Credit Availability
    Credit Constraints and Payday Loan Use
    Education

V. PAYDAY LOAN USE AND EXPERIENCE

    Most Recent Payday Loan
    Awareness of Price
    Consideration of Alternatives
    Post-Purchase Evaluation
    Payday Loan Use during the Last Twelve Months
    Frequency and Duration of Use
    Late Payments on Payday Loans
    Attitudes toward Credit and Payday Loans

VI. ARE PAYDAY LOANS WEALTH INCREASING?

    Community Well-Being in the Aftermath of Natural Disasters
    Credit Availability, Debt, and Delinquency of Vulnerable Borrowers
    Credit Problems after Payday Loan Bans
    Payday Loans and Bankruptcy
    Experimental Studies

VII. SUMMARY AND CONCLUSIONS

    Are Payday Loan Customers Consumers Who Might Benefit from Such Credit?60
    Do Payday Loan Customers Know What They are Doing?
    Rationality of Payday Loan Use
    Conclusions

REFERENCES
APPENDIX 1: VARIABLES USED IN MULTIVARIATE ANALYSES OF PAYDAY LOAN USE
APPENDIX 2: LOGISTIC REGRESSION FOR FACTORS ASSOCIATED WITH AWARENESS OF THE ANNUAL PERCENTAGE RATE ON THE MOST RECENT NEW PAYDAY LOAN
APPENDIX 3: NEGATIVE BINOMIAL REGRESSION FOR FREQUENCY OF PAYDAY LOAN USE DURING THE PREVIOUS 12 MONTHS
APPENDIX 4: LOGISTIC REGRESSION FOR ANY LATE PAYMENTS ON PAYDAY LOANS IN THE LAST 12 MONTHS

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