Reason Foundation

Reason Foundation

Payday Lending: Protecting or Harming Consumers?

Many criticisms of payday lending are based on myths. The evidence shows payday lending offers benefits to consumers

Adam Summers
November 5, 2013

The payday lending industry has enjoyed meteoric growth in the past couple of decades. From virtually no payday lending stores in the early- to mid-1990s, it has grown to more than 20,000 outlets today. These payday lending facilities extend about $38.5 billion in short-term credit to 19 million American households a year.

The payday lending industry’s success has been accompanied by a backlash from politicians, consumer groups and many journalists who accuse the industry of taking advantage of vulnerable individuals and targeting certain populations in order to extract their wealth. The result is that regulation of payday lending has grown almost as fast as the industry itself.

The industry responds to its critics by saying that it provides a needed service to people underserved by banks and credit unions, allowing them access to credit they would not otherwise have so that they may make it through periods of financial difficulty. Who is right? On closer inspection, many of the criticisms of the payday lending industry turn out to be based on myths:

Moreover, the evidence shows that payday lending offers many benefits to consumers:

Ultimately, consumers have already rendered their verdict: they believe they benefit from the option of payday loans. So instead of restricting or eliminating payday lending markets through regulation, policymakers should seek to open them up to competition by repealing payday lending bans and regulations. The goal should be to maximize consumer choice and minimize the cost of short-term loan transactions. This will benefit economic growth generally and short-term borrowers in particular.

Adam Summers is Senior Policy Analyst

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