Payday loan regulations

Payday loans are small, short-term loans that must be repaid by a borrower’s next payday. To receive a loan, a borrower generally writes a check to the lender, who provides cash for the amount minus a fee. When the loan is due the check is cashed. Payday loans are usually offered by specialized companies instead of banks or credit unions. Fees average $15-$30 per $100 borrowed (Stegman 2007), yielding annual percentage rates of nearly 400%. Payday loan regulations can include bans, caps on maximum interest rates and loan amounts, minimum loan terms, and truth in lending statements educating consumers on the true costs of loans. 

Expected Beneficial Outcomes (Rated)

  • Increased financial stability

Evidence of Effectiveness

There is insufficient evidence to determine whether payday loan regulation increases financial stability for individuals in the communities where they are implemented. Available evidence suggests that payday loan bans, caps, and consumer education on the true costs of the loans appear to reduce, though not eliminate, use of payday loans (McKernan 2013, Zinman 2010*, Bertrand 2011*). Bans may reduce involuntary bank account closures (Campbell 2012*) and bankruptcies (Morgan 2012*), and caps on maximum loan amounts or interest rates may decrease use of other high cost, short-term credit resources such as pawn shops (McKernan 2013, Zinman 2010*). However, bans and caps may also limit access to credit in emergencies, increasing the number of bounced checks, overdraft fees, and bills paid late (Morgan 2012*, Zinman 2010*). Payday loan access may increase financial hardship in some circumstances, but may alleviate it in others (NBER-Zinman 2013, Morse 2011*, Melzer 2011*). Additional evidence is needed to confirm effects. 

Impact on Disparities

Likely to decrease disparities

Implementation Examples

Payday loan regulations vary by state. Thirty-eight states specifically allow payday lending, while the other twelve have no payday specific statutes and rely on other regulations (NCSL-Payday lending statutes).

Implementation Resources

CRL - Center for Responsible Lending (CRL). State of lending: Payday loans.

NCSL-Payday lending statutes - National Conference of State Legislatures (NCSL). Payday lending statutes.

Citations - Evidence

* Journal subscription may be required for access.

McKernan 2013 - McKernan S-M, Ratcliffe C, Kuehn D. Prohibitions, price caps, and disclosures: A look at state policies and alternative financial product use. Journal of Economic Behavior & Organization. 2013;95:207–23.

Zinman 2010* - Zinman J. Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap. Journal of Banking & Finance. 2010;34(3):546–56.

Bertrand 2011* - Bertrand M, Morse A. Information disclosure, cognitive biases, and payday borrowing. Journal of Finance. 2011;66(6):1865–93.

Campbell 2012* - Campbell D, Asís Martínez-Jerez F, Tufano P. Bouncing out of the banking system: An empirical analysis of involuntary bank account closures. Journal of Banking & Finance. 2012;36(4):1224–35.

Morgan 2012* - Morgan DP, Strain MR, Seblani I. How payday credit access affects overdrafts and other outcomes. Journal of Money, Credit and Banking. 2012;44(2-3):519–31.

NBER-Zinman 2013 - Zinman J. Consumer credit: Too much or too little (or just right)? National Bureau of Economic Research (NBER); 2013: Working Paper 19682.

Morse 2011* - Morse A. Payday lenders: Heroes or villains? Journal of Financial Economics. 2011;102(1):28–44.

Melzer 2011* - Melzer BT. The real costs of credit access: Evidence from the payday lending market. Quarterly Journal of Economics. 2011;126(1):517–55.

Citations - Implementation Examples

* Journal subscription may be required for access.

NCSL-Payday lending statutes - National Conference of State Legislatures (NCSL). Payday lending statutes.

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