| dc.description.abstract | Since payday lenders came on the scene in 1990s, regulation of
their ')redatory" practices has been swift and often severe. Fourteen
states now ban payday loans outright. From an economist's
perspective, high-interest, short-term, small loans need not be a bad
thing. Payday credit can help borrowers "smooth" consumption,
unequivocally improving welfare as consumers borrow from future
good times to help cover current shortfalls. These benefits of credit
can accrue even at typical payday loan interest rates of 300%-600%
APR. The question of whether payday credit actually assists
borrowers in this way is an empirical one. In this Article, I review the
existing evidence on how borrowers use payday loans. I document the
prevalence of rollovers and default, the effect of varying principal
amounts and loan durations, the existence of self-control problems
and myopia among borrowers, and the demand for payday loans
over other types of cheaper credit. I then document the disconnect
between this collection of evidence and the existing regulatory
frameworks which purport to help consumers avoid misuse of
payday loans. These regulations on payday lending include outright
bans, price caps, minimum and maximum loan lengths, minimum
and maximum loan sizes, and rollover restrictions. I argue that:
(1) outright bans are misguided, (2) larger loans can actually help
borrowers, (3) loan-length restrictions are ineffective, and (4) rollover
restrictions do make sense. | en_US |
