The Effects on Consumers from Two State-Level Regulations of the Payday Loan Market

We analyze 15.6 million payday loans made to 1.8 million unique borrowers in 2013. We test the effects of three, common state regulations on payday loans: usury ceilings on the allowable fees that can be charged, limits on the amount that can be borrowed at any time, and limits on the number of loans a borrower can have outstanding at one time. Using difference-in-means tests and non-parametric Wilcoxon Rank Sum tests for the 30 states in our sample, we find that the number of loans per person in states with maximum loan amount limits less than or equal to $500 is higher than in states with maximum loan amount limits greater than $500. There is a simple explanation for this statistical relationship between loan-amount limits and number of loans per person. If consumers are unable to borrow the amount needed at any given time, they will respond by increasing their loan volume to obtain the needed funds. We find that the average amount borrowed between the two groups is not statistically significantly different. We also find that borrowers in states with lower fee caps take a larger number of payday loans, which we attribute to a likely increase in demand resulting from artificially constraining the price of payday loans relative to other types of alternative credit. We also find that in states with low caps on permissible loan fees most payday loans are made at the fee cap. In states with no fee cap, prevailing prices are higher but the difference is not economically significant. Limits on permissible loan size are less binding except in states with very low loan limits, because many consumers borrow less than the permissible amounts.