Payday Loans versus Pawn Shops: The Effects of Loan Fee Limits on Household Use

Abstract

This paper uses data from the January 2009 FDIC Unbanked/Underbanked Supplement to the Current Population Survey (CPS) to examine how household use of payday loans and pawn shops is related to limits on loan fees set by states. We use information in the CPS to measure the relationship between household characteristics and payday loan and pawn shop usage and to control for these factors in examining the relationship between usage and state fee ceilings. We find little relationship between levels of fee ceilings in their current range and payday loan usage. Results for pawn shops indicate somewhat more variation in usage over the current range of pawn-shop fee ceilings. The results are generally consistent with conjectures that because of scale economies at the store level, payday lenders can adjust the scale of store operations to maintain profit margins and thus continue to lend over a range of fee ceilings. This finding suggests that lowering loan fee ceilings up to some point can benefit borrowers, many of whom report using these loan to meet basic living expenses or to make up for lost income.