Does borrowing at 400% APR do more harm than good? Some prior studies find that, on average, expensive consumer loans help borrowers smooth negative shocks (Morse 2007; Wilson, Findlay, Meehan, Welford and Schurter 2008), make productive investments in job retention (Karlan and Zinman 2008), or better manage liquidity to alleviate financial distress (Morgan and Strain 2008). Other studies find that increased access to expensive credit increases financial distress (Melzer 2007; Campbell, Martinez-Jerez and Tufano 2008; Skiba and Tobacman 2008a).

The Pentagon is convinced that payday borrowing does more harm than good for the military. Following evidence that payday lenders target military markets (Graves and Peterson 2005), and internal studies showing high prevalence of borrowing and concomitant adverse effects on personnel stress levels and job attentiveness (Department of Defense 2006), the Pentagon successfully lobbied Congress for a binding federal cap on loans to military members and their families (36% APR, effective October 1, 2007). The Pentagon argued that “predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all volunteer fighting force” (Department of Defense 2006, p. 9). The President of the Navy Marine Corps Relief Society called payday lending in particular “the most serious single financial problem that we have encountered in [a] hundred years” (Center for Responsible Lending et al 2007). Payday borrowing is viewed as particularly problematic given its high annualized cost (390% APR), prevalence (e.g., an estimated 20-25% of military households borrowed in 2005), and the high frequency of serial borrowing.