Ebook Payday Advance Credit In America: An Analysis Of Consumer Demand
Payday advances are very small, short-term consumer loans. In a payday advance transaction, the customer writes a check for the amount of the loan and finance charge. The creditor agrees to hold the check until the next payday, typically about two weeks, when the customer redeems the check with cash or the creditor deposits the check. Other names for this product are payday loans, cash advances, and deferred presentment services.
Consumer demand for very small, short-term consumer loans is not new. In the latter part of the nineteenth century, small loan companies lent small amounts using chattel mortgages or wage assignments. These small loan companies typically charged annual interest rates ranging from 20-300%, well in excess of the legal interest rate of 6% per annum. Payments were scheduled for every payday. For a typical loan of $25, payments would be scheduled for 13 weeks. The customers of these companies were primarily government employees, low-level white collar workers, skilled-tradesmen and foremen. These companies served the credit needs of moderate-income workers, who struggled to keep up with their middle-class ambitions.
The small loan business was illegal, of course. But the usury laws were sporadically enforced, and the business prospered because it served a real need. Eventually, the small loan industry became a target of Progressive reformers, who prosecuted the illegal small loan companies. However, the reformers realized that a need existed and recognized that it was impossible to make a profit on small loans with a 6% interest rate. Therefore, the reformers proposed higher rate ceilings for small loans in exchange for licensing and regulating of creditors extending such credit. Many small loan companies came to accept such proposals, and in 1917 a committee of reformers and small loan companies agreed on model legislation, the Uniform Small Loan Law. The subsequent passage of small loan legislation in many states enabled creditors to make small loans profitably and allowed emergence of the modern finance company industry.
The cost structure of the consumer finance industry is such that operating costs increase less than proportionately with loan size (Benston [1972]; Durkin and Elliehausen [1998]). In other words, companies producing larger loans have lower costs per dollar of credit than companies producing smaller loans. Thus, for a given interest rate, larger loans are more profitable than smaller loans. Perhaps because of increased competition unleashed by deregulation of financial service markets in the 1980s, many finance companies, which historically served the very small loan market, shifted their business to more profitable, large consumer loans. Banks offer revolving credit (bank cards and check credit) to satisfy small and short-term credit needs, but many consumers still have limited access to such credit despite the development of a subprime market for bank cards.
The payday advance industry emerged during the 1990s to serve a void created by the withdrawal of traditional lenders from the very small loan market. Payday advance credit is different from the small loans offered by finance companies. Payday advances are single payment loans rather than instalment loans, and the underwriting process for payday advances does not involve a credit investigation. Therefore, the costs and risks of the two types of credit are not the same. However, it is likely the factors influencing the demand for these products are similar. This monograph investigates the demand for payday advance credit using new data from a representative survey of customers of payday advance companies belonging to the industry’s national trade association, the Community Financial Services Association of America. The strong demand for very small, short-term consumer loans is evident from the growth in the payday advance industry. The number of payday advance offices grew from virtually zero offices in 1990 to over 10,000 offices in 1999 (Stephens Inc. [1999])
CONTENTS
ACKNOWLEDGMENTS
EXECUTIVE SUMMARY
INTRODUCTION
CHAPTER 1 THE PAYDAY ADVANCE TRANSACTION
- Loan Size and Finance Charges
The Underwriting Process
Costs
Regulatory Environment
- State Laws
Federal Laws
Self-Regulation
Consumer Protection Issues
CHAPTER 2 ANALYZING THE BENEFITS AND COSTS OF A PAYDAY ADVANCE TRANSACTION
- Analytical Model for Consumer Credit Use
Analysis of the Payday Advance Transaction
Evaluating Availability of Alternatives
CHAPTER 3 SURVEY OF PAYDAY ADVANCE CUSTOMERS
- Survey Objectives
Target Population
Methodology
- Sample Design and Selection
Interviewing
CHAPTER 4 FRAMEWORK FOR ANALYSIS
- The Buyer-Behavior Model
- Problem Recognition
Internal Search
External Search and Alternative Evaluation
Purchase 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
CHAPTER 5 SURVEY RESULTS
- Characteristics of Payday Advance Customers
- Family Income
Age, Marital Status, and Family Life-Cycle Stage
Income and Family Life-Cycle Stage
Education
Attitudes Toward Credit and Payday Advances
- Attitudes toward Credit
Attitudes Toward Payday Advances
Perceptions of the Cost of Payday Advances
Consumer Experience With Payday Advance Credit
- Frequency and Duration of Payday Advance Use
Use of Different Payday Advance Companies
Late Payments on Payday Advances
Availability of Alternatives to Payday Advance Credit
- Availability and Use of Bank Card Credit
Debt-Payment Burdens of Payday Advance Customers
Credit Availability
Customers’ Most Recent Payday Advance Transaction
- The Most Recent Payday Advance
The New Payday Advance Decision
CHAPTER 6 SUMMARY AND CONCLUSIONS
- Survey of Payday Advance Customers
Survey Findings
- Characteristics of Payday Advance Customers
Attitudes Toward Credit and Payday Advance Credit
Consumer Experience With Payday Advance Credit
Availability of Alternatives to Payday Advance Credit
The Most Recent Payday Advance
APPENDIX A Best Practices for the Payday Advance Industry
APPENDIX B Questionnaire
BIOGRAPHIES OF AUTHORS
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