Predatory lending is a myth

In recent years, a number of lenders have been hit with predatory-type lending lawsuits. In these lawsuits, which have mainly involved automobile finance companies and mortgage lenders, the complaint usually alleges that the lender took advantage of a particular group and charged them higher than normal rates. Payday lenders, which make unsecured loans based on a borrowers paycheck, are frequently in the media and criticized for the triple digit APRs that they charge borrowers for short term loans.

A new study by Edward Lawrence and Gregory Elliehausen, suggest that pay lenders are in fact not bad and satisfy a financial need for a segment of the population. (Analysis of Payday Loan Customers, Contemporary Economic Policy, Vol. 26, No. 2, April 2008, 299-316)

Using a national survey of payday loan, finance company, and credit card users the authors find:

- That most payday loan customers report a positive experience with payday lenders
- Most payday loan customers are aware of the cost of the loan (in terms of the finance charge; but not the APR however)
- Payday loan customers are not captive borrowers and instead use other types of credit as well.
- The use of payday loans is consistent with studies of income and life time earnings that suggest the use of payday loans fills a financial need, instead of imposing a cost, for borrowers

Overall the study is interesting but limited. For example, the survey used by the authors was provided by payday loan companies and did not actually address a number of the issues that policy makers are concerned about concerning predatory pricing. Moreover, there is no way to determine if the high APR charged on payday loans contributes in any part to the financial condition of the payday loan borrowers. In addition, the one regression model, that looks at and controls for many different factors, in the paper actually suggests that payday loans may be a problem and create a circular pattern of debt situation for some borrowers

Finance companies overcharge African-American automobile loan borrowers

Hot Research Friday!

Charles, Hurst, and Stephens (2008) article, "Rates for Vechicle Loans: Race and Loan Source" (AER, 2008 98:2,315-320), finds that finance companies, such as GMAC, charge African-American more than similarly situated White borrowers at finance companies. Some of their statistical models point to differences as large as 120 basis points (1.2%) higher rates for African-American borrowers.

The authors do not find a similar differential for African-American borrowers at banks. They also find that most of the difference in rates is between similarly situated African-American high interest rate borrowers and White hihg interest rate borrowers.