What do they Actually Pay? the True Cost of Borrowing in the PayDay Lending Industry
No Thumbnail Available
Date
2016-08
Authors
Marc, A, F
James, A, K
Journal Title
Journal ISSN
Volume Title
Publisher
Hilton New York JFK, Jamaica-Queens, New York
Abstract
In 2011 the payday loan industry is estimated to have
lent $32 billion, collecting $7 billion in interest and
fees (Dougherty, Carter, "Consumer Bureau Focuses
on Payday Lending", Bloomberg Business Week,
January 19 2012). The peak of payday lending came in
the past decade but has started declining (Alp er,
Alexandria, "US Payday Lenders Point Fingers to
Blunt Crackdown", Reuters, January 20, 2012) with
increased regulation and enforcement. In the case of
regulation, the most common policies are caps on
interest rates charged to borrowers; such caps motivate
this paper. Our hypothesis contends that the effective
interest rate after accounting for defaults and late
payments is significantly less than the posted interest
rate. To test this we employ a database of 7,709
borrowers in six states and calculate the true interest rates that borrowers paid on these loans and how
much, if any, they deviate from the advertised rate. In
order to achieve this we calculate the internal rate of
return -interest rate- for each borrower's series of
loans. Our results show that a payday loan customer
on average pays a 6.9% interest rate on a two week
loan, or 180% when annualized. This is opposed to the
typical 16.9% calculated posted rate attached to such a
loan which equates to an advertised annualized rate of
438%. Further we investigate the factors that are
correlated with this lower interest rate and investigate
how operating costs reduce this figure even further.
Description
IPPEAN Conference Proceedings
Keywords
Payday Loan , Interest Rate , Default , Consumer Credit
Citation
Marc, A.F, James, A.F, (2016) What do they Actually Pay? the True Cost of Borrowing in the Payday Lending Industry. New York: IPPEAN