Payday Lending and Payments Services: A Historical and Modern Analysis

Abstract

Payday lending—the business of buying postdated personal checks from consumers at a discount—is a booming business. Despite carrying annual percentage rates (APRs) of 300%, 400%, and higher, payday loans have quickly become a very popular means of consumer credit. The number of payday loan “stores” in the United States increased from only about 300 in 1994 to over 21,000 by 2004, and over 10 million U.S. households take out at least one payday loan each year.’ The rapid growth of payday lenders has come at the expense of pawn shops, which have lost considerable market share over the past decade. Apparently, consumers find payday loans to be a superior alternative to other, more traditional “fringe finance” products.