A COMPARATIVE ANALYSIS OF PAYDAY LOAN CUSTOMERS

EDWARD C. LAWRENCE and GREGORY ELLIEHAUSEN*

One of the most rapidly growing and controversial forms of consumer lending to
recently emerge in the marketplace has been payday advances. This form of credit
allows the borrower to obtain a small amount of cash for a short period of time. Claims
of predatory lending often arise due to the high annual percentage rates that result
from the fees for borrowing small amounts of money for 2 wk or less. By analyzing the
data collected in a national survey of payday customers, this research allows policymakers to better understand what type of consumer borrows from payday lenders, for
what purpose, and what the true benefits and costs are. The results confirm a strong
demand for payday loans that satisfy a real financial need within a certain segment of
the population. (JEL D12, D18, G20)
I.

INTRODUCTION

to allow policymakers to understand what

type of consumer borrows from payday lenders, for what purpose, and what the true benefits and costs are.1 The goal of this article is
partially to fill this void by investigating the
economic issues surrounding payday lending
and carefully comparing the characteristics
of consumers who choose to borrow money
in this form rather than from alternative sources of short-term financing.
The payday loan industry has experienced
phenomenal growth over the past decade and
a half. As recently as 1990, there were almost
no payday loan facilities in the United States.
By 2006, the Community Financial Services
Association of America (CFSA), the trade
association for the payday industry, reported
that there were more than 15,000 loan offices,
with $25 billion in short-term credit extended.
This growth demonstrates a strong consumer
demand for small amounts of short-term
credit that may not be adequately served by
more traditional sources of consumer lending.
Historically, finance companies offered small
closed-end instalment loans, but these lenders

In recent years, one of the most controversial segments of the consumer finance industry
has been payday loans. In the popular press,
critics often complain that this form of credit
is predatory in nature since it charges many
low-income households triple-digit annual
percentage rates (APRs) to borrow small sums
of money for a short period of time. Lenders,
on the other hand, note that returned check
charges and late fees can result in even higher
charges for consumers. Payday companies
also defend their practices by pointing to
the growing demand for these services, suggesting that this market would otherwise be
underserved. The industry argues that the typical customers are not the low-income persons
who are being forced by circumstances beyond
their control to borrow increasing amounts of
money until they are financially distressed.
Unfortunately, despite the strong opinions
held by both sides, there has been very little
academic research conducted on the industry
*This is a revision of a paper presented at the Western
Economic Association International 76th annual conference, San Francisco, July 7, 2001. The authors thank
Michael Staten, Thomas Durkin, and James Lacko for
their comments on our previous work on this topic. This
research was supported, in part, by a grant from the CFSA.
Lawrence: Professor and Department Chair, College of
Business Administration, University of Missouri,
St. Louis, MO 63121. Phone 314-516-6148, Fax 314516-6420, E-mail eclawrence@umsl.edu
Elliehausen: Associate Research Professor, Center for
Real Estate and Urban Analysis, School of Business,
George Washington University, Washington, DC
20052. Phone 202-994-0892, Fax 202-994-0907, E-mail
elliehau@gwu.edu

1. At first glance, it would seem irrational for any consumer to borrow money at an interest rate exceeding 400%
under any circumstance. However, Elliehausen and Lawrence (2001) and Elliehausen (2006) have demonstrated
that there are plausible situations in which the use of
high-price credit is wealth maximizing and rational.

ABBREVIATIONS
APR: Annual Percentage Rates
CFSA: Community Financial Services
Association of America

299
Contemporary Economic Policy (ISSN 1074-3529)
Vol. 26, No. 2, April 2008, 299316
Online Early publication October 18, 2007

doi:10.1111/j.1465-7287.2007.00068.x
2007 Western Economic Association International

300

CONTEMPORARY ECONOMIC POLICY

have largely withdrawn from this market

because of the high production cost (Brito
and Hartley, 1995).2 Bank cards are a source
for borrowing small amounts, but despite the
spread of bank credit cards to higher risk consumers, many payday customers either do not
have bank credit cards or have already
reached the maximum credit limit. Economic
theory, as discussed below, suggests that consumers with limited access to credit may significantly benefit from the relaxation of
constraints.3 Several other sources are available for borrowing small amounts, but payday
loans are emerging as one of the most heavily
used of these sources.4
In the United States, the payday industry is
very diverse. There are four large publicly
traded companies that have expanded rapidly
and offer payday advances and other services
like check cashing and pawnshops. The two
largest, Cash America and Advance America,
each had approximately $670 million in revenue in 2006, more than 4,500 employees and
market capitalizations in excess of $1.2 billion.
EZCorp and First Cash Financial Services are
approximately half the size of the two leaders
but are solid competitors. The other major
player, Ace Cash Express, went from a publicly
traded company to a privately held one in
2006. The rest of the industry consists of
smaller independent local and regional firms,
most of which are family owned and operated
with limited capital resources. Some payday
companies partner with national banks in
states like South Dakota and Delaware that
do not have interest rate ceilings. This allows
the payday companies to export the more
2. The traditional small loan from a consumer finance
company was generally larger than typical payday loan
sizes, in part, because rate ceilings were not sufficiently
high for very small loan sizes to be profitable (National
Commission on Consumer Finance, 1972). An exception
that does permit loans in the size range of payday loans is
Article 3.16 of the Texas Consumer Finance Code, which
has special interest rate ceilings for borrowing $440 or less
(Elliehausen, 2006).
3. Even a small amount of cash may be sufficient to
cover an unexpected emergency like getting a prescription
filled for an illness, getting a car repaired so the person can
get to work, paying a critical utility bill, etc. The consequences of not borrowing may be so severe that even
a $60 cost for a $300 payday loan may seem trivial in comparison to losing a job or having ones electric shutoff.
4. Other sources for small amounts of credit include
pawnshops, title loan companies, sale/leaseback contracts,
check overdraft protection, loan sharks, and friends and
relatives. For more information on these alternatives,
see Caskey (1991), Johnson and Johnson (1998), Morstad
(2001), and Quester and Fox (2005).

favorable rates to other states under the

National Banking Act. Other banks (e.g.,
Wells Fargo) do their own direct payday lending. In an interesting parallel to online gambling, online payday loans are also available
to Americans with some companies originating offshore in places like Costa Rica (Eyre,
2005).
Payday loans are available in some foreign
countries including the United Kingdom,
Canada, Sweden, and Australia. It should also
be noted that payroll lending has long been
popular in emerging markets. For example,
in India, South Africa, and other countries
with weak collateral laws and poor credit history files, payrolls are often the only available
collateral. The United States currently provides researchers with a unique opportunity
to study the efficacy of these services in a large,
developed market and assess the various needs
the product satisfies for consumers.
Payday lenders consist of monoline companies that offer only payday advances or multiproduct companies that offer other services
such as check cashing, pawn loans, and wire
transfer. Payday credit is different from other
small loans offered by finance companies. Payday advances are single payment loans rather
than instalment loans, and the underwriting
process for payday loans does not involve
a credit investigation. Therefore, the costs
and risks of the two types of credit are not
the same. Yet, it is likely that the factors influencing the demand for these and other higher
price products are similar. This article investigates the demand for payday credit using
recent data from a representative survey of
customers of payday companies belonging
to the industrys national trade association,
the CFSA. That payday loans satisfy a strong
demand for small, short-term consumer loans
is evident from the explosive growth of the
payday advance industry.
II.

THE PAYDAY ADVANCE TRANSACTION

A payday advance is a small, short-term,

single payment consumer loan. In a typical
transaction, the customer writes a personal
check for the sum of the loan amount plus
a finance charge. In most cases, the borrower
will not have a sufficient balance in his checking account at the time the check is written to
clear the check. However, as part of the contract, the lender agrees in writing to defer

LAWRENCE & ELLIEHAUSEN: ANALYSIS OF PAYDAY LOAN CUSTOMERS

depositing the postdated check until the customer gets paid, typically 730 d later. On
the next payday, the customer may redeem
the check by paying the loan balance with cash
or the creditor may deposit the check. In some
states, the customer may extend the payday
advance by paying only the finance charge
and writing a new check. Other names for this
product are payday loans, cash advances, and
deferred presentment services.
Payday lenders operate under special state
laws specifically authorizing payday advances
or as middlemen for federally chartered financial institutions located in states that permit
such lending. Thirty-seven states have passed
laws regulating payday advances, many of
which also incorporate Best Practices to set
industry standards.5 The size of the loan usually ranges from $100 to $500, although a few
jurisdictions (e.g., the District of Columbia)
permit payday advances up to $1,000. Finance
charges are typically between $15 and $20 per
$100 of the loan amount. The industry practice is to assess the same dollar amount for
the finance charge regardless of whether the
money is borrowed for 4 or 14 d. As a result,
the APRs can range from 390% to more than
1,000% for money borrowed for only a few
days. Not surprisingly, these rates have fueled
much of the controversy in the press over the
merits of payday loans.
III. THE INDUSTRY COST STRUCTURE

As shown by Benston (1975) and Durkin

and Elliehausen (1998), the cost structure of
the consumer finance industry is such that
operating costs increase less than proportionately with loan size. This relationship exists
because many of the costs occur whenever
an application is accepted, a loan is made,
or payments are serviced. These activities must
be performed regardless of the size of the loan.
Companies producing larger loans have lower
costs per dollar of credit extended than those
producing smaller loans. Thus, for a given
interest rate, larger loans are more profitable
than smaller loans. Because of the increased
competition unleashed by the deregulation
5. The states that do not presently have a payday
advance statute or have rate ceilings that prevent payday
advances include Texas, Arkansas, Georgia, North Carolina, West Virginia, Maryland, Pennsylvania, New Jersey,
New York, Connecticut, Massachusetts, Vermont, and
Maine.

301

of financial service markets in the 1980s, many

finance companies (which historically served
the small-loan market) shifted their business
toward more profitable, large consumer loans.
Banks offer revolving credit (bank cards and
check credit) to satisfy small and short-term
credit needs, but some consumers still have
limited access to such credit, despite the development of a subprime market for bank cards.
To lower the overhead cost of providing
credit, payday companies have streamlined
the application procedure and underwriting
process. The underwriting process consists
primarily of verifying the applicants income
and the existence of a bank account. Lenders
typically request that applicants bring their
last bank statement, most recent pay stub,
identification, and proof of residence. Creditors also limit the maximum amount of the
advance to a specified percentage of the customers take-home pay. Unlike traditional
lenders, payday advance companies do not
obtain a credit bureau report or perform
any credit analysis using the consumers
expense information. Some companies, however, do subscribe to a risk assessment service,
called Tele-Track, which provides information
on the current payday advance use by the
applicant.
Taking a postdated check reduces the cost
of collection. If the consumer fails to redeem
the check, the payday company has a relatively
low-cost method of collection. The company
can deposit the check to obtain payment of
the loan amount and finance charge. Depositing the check does not ensure payment, of
course, since the customer may not have sufficient funds in his account. But not having
adequate balances in the account subjects
the customer to bank overdraft fees, which
makes failure to repay the loan costly to the
customer and provides an added incentive.
This externally imposed penalty thereby
reduces both the probability of default and
the expected value of collection costs.
Very little empirical data on the cost structure of the payday industry are available.
Flannery and Samolyk (2005) provided the
most comprehensive analysis of payday loan
costs using office-level data from two monoline companies. Like other consumer lenders,
payday lenders operations are very labor
intensive. Salaries and administrative expenses
account for nearly half of annual gross revenues of these companies. Payday company

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CONTEMPORARY ECONOMIC POLICY

employees take applications, disburse funds,

receive payments, and collect overdue
accounts. Payday lenders streamlined process
produces a relatively risky product. Loan losses amounted to 13.7% of gross revenues
across all offices, which is very high compared
to losses for other forms of consumer credit.6
IV. ANALYTICAL MODEL FOR CONSUMER
CREDIT USE

Juster and Shay (1964) developed the basic

theoretical model of consumer credit use,
which builds on the consumption/investment
choice model of Fisher (1930) and Hirschleifer
(1958). Consumer credit is typically used to
finance the purchase of household durable
goods, which provide a return in the form
of a stream of services over a period of time.
The economic value of the stream of services
can often be measured in terms of the cost of
purchasing those services in the market. For
example, the value of the services of a washing
machine could be measured by the cost of
obtaining the services in a Laundromat; the
services of an automobile could be measured
by renting a car or the cost of using public
transport; or the services of a television or
DVD player can be valued by the cost of going
to the cinema, a concert, or other entertainment activities that would be undertaken if
television or DVD player were not available.
Empirical research by Poapst and Walters
(1964) and Dunkelberg and Stephenson
(1975) suggests that rates of return on household durables can be quite large when usage is
high.
Viewing the purchase of a durable as an
investment, the consumer compares the purchase price of the durable with the present
value of the services it provides. At the optimum point, the rate of return on investment
is equated with the appropriate discount rate.
This discount rate can be the borrowing rate,
the rate of time preference, or the lending rate.
The extension of the consumption/investment
model by Juster and Shay allows for borrowing limits (rationing) for a given interest rate,
with the possibility of additional (also limited)
6. In the consumer finance company data used by
Durkin and Elliehausen (1998), loan losses were 8.6%
of revenue. For consumer finance companies producing
very small instalment loans (about the same size as payday
loans) under Article 3.16 of the Texas Consumer Credit
Code, loan losses in 1968 were 8.7% of revenue (Durkin,
1975).

credit at a higher rate. The model shows the

conditions under which borrowing at high
rates may be optimal for a consumer. These
conditions are characterized by relatively
high-return investment opportunities, low current income, and strong preferences for current consumption.
Juster and Shay used this framework to
analyze consumer credit markets. Normally,
consumer credit is repaid by instalments out
of future income. Most consumers do not have
sufficient liquid assets to repay debts with
a lump sum. To reduce default risk, creditors
typically limit the amount of credit, requiring
borrowers to build equity in the durable being
financed. The equity requirement reduces
default risk by making nonpayment more
costly to the borrower. This requirement
may also affect the cost of financing the
durable because building equity forces the
borrower to forgo current consumption. Borrowers not wishing to forgo current consumption to satisfy equity requirements can
sometimes obtain additional credit using unsecured personal credit, but this credit is riskier
and more expensive. For many marginal consumers, additional unsecured personal credit
is available only from specialized high-risk
creditors at a substantially higher cost.
A. Types of Borrowers
According to the terminology of Juster and
Shay, borrowers who were constrained by
creditors equity requirements are referred to
as rationed, whereas others who were not
so constrained are unrationed. They hypothesized that rationed borrowers would be in
early family life-cycle stages where rates of
return on household investments would be
high. These borrowers would also have relatively low or moderate income, which would
make sacrifices in current consumption to satisfy equity requirements very costly. Rationed
borrowers would have relatively low levels of
savings, making use of liquid assets to pay for
household investment more costly to them.
Rationed borrowers demand for credit would
be unresponsive to increases in interest rates
because returns on household investment
are high and the availability of credit is more
limited.
Unrationed borrowers, in contrast, generally would be in later family life-cycle stages
or have relatively high incomes. Given their

LAWRENCE & ELLIEHAUSEN: ANALYSIS OF PAYDAY LOAN CUSTOMERS

current asset holdings, these borrowers have

relatively few high-return household investment opportunities and would have discretionary income to pay for new household
durables. Their older age and higher income
allow unrationed borrowers to have proportionately higher levels of savings. Thus, using
liquid assets to purchase durables would not
be especially difficult for unrationed consumers. The model predicts that unrationed borrowers demand for credit would be sensitive
to APRs.
There is no question consumer credit markets have changed substantially since the
study by Juster and Shay. Advances in information and technology have improved
creditors abilities to assess and price risk.
Equity requirements have been relaxed, as
terms to maturity have lengthened for most
closed-end instalment credit. Another consequence of these developments is the growth
in availability of unsecured credit through
bank credit cards. Today, many borrowers
use bank cards in much the same way as
Juster and Shay described earlier borrowers
using unsecured personal loans (Bizer and
DeMarzo, 1992; Brito and Hartley, 1995). A
subprime credit card market has developed
specifically to serve such borrowers, although
some consumers do not have bank credit cards
and market innovations have flourished to
provide credit to rationed borrowers.7 The
emergence of the modern payday advance
industry is one such development.
Recent research by Attanasio (1994) and
Attanasio, Goldberg, and Kyriazidou (2000)
supports the continued applicability of the
model by Juster and Shay. These papers test
hypotheses suggested by Juster and Shay using
recent data on automobile purchases from the
Consumer Expenditure Survey. Findings were
consistent with the hypotheses of Juster and
Shay. Middle-age consumers demand for
credit was more sensitive to changes in interest rates than younger consumers demand.
Younger consumers demand was more sensitive to changes in the term to maturity, which
has a relatively larger effect than interest rates
7. Durkin (2000) reported that 32% of families did not
have a bank credit card and 27% of families did not have
any credit cards in 2000. Lack of a bank card was especially common in the lowest quartile of income (72% of
families in the lowest quartile did not have a bank card),
but some families in higher quartiles also did not have
bank cards.

303

on the size of monthly payments, than middleage consumers.

V. EVALUATING AVAILABILITY OF ALTERNATIVE
FINANCING

Economists studying use of credit products

should evaluate the transaction by comparing
the investment outlay with the present value of
savings and using the cost of the source for the
discount rate in a present value calculation.8
However, a few characteristics of consumers
financial behavior may cause the nominal and
subjective costs of alternatives to diverge.
These characteristics involve the precautionary motive for saving and the use of financial
contracts to enforce budgetary discipline.
Both characteristics are described generally
in the literature on behavioral economics
(Rabin, 1998).
First, subjective yields on liquid asset holdings tend to be high because precautionary
motives for saving are strong. Many consumers
draw down liquid assets grudgingly even when
events occur that impair their earnings potential
or require large expenditures. Katona (1975)
has shown their reluctance to use liquid assets
stems from a belief that the worse the current
situation, the greater is the need to maintain
reserves for future emergencies. As a consequence, subjective yields on liquid assets are
often substantially greater than nominal yields.
This attribute of financial behavior may explain
consumers simultaneous holding of debt and
relatively large amounts of liquid assets. The
weighted average interest rate on the outstanding consumer credit is greater than the nominal
yield but less than the subjective yield on the
liquid assets. Since consumers who have personal loans from finance companies or credit
card debt also hold liquid assets, the subjective
yield on liquid assets is likely to be quite high
for some consumers.
Second, consumers may use consumer
credit rather than draw against their liquid
assets because they may not have the discipline
to replenish the depleted assets. The loan
agreement forces the borrower to budget his
money, saving via debt repayment rather than
spend future income on the numerous goods
8. For short-term loans, consumers can evaluate cash
flows without discounting because the effect of discounting is often only a few cents for relatively small amounts
over 1 or 2 wk. For examples, see Elliehausen (2006, table
3.2).

304

CONTEMPORARY ECONOMIC POLICY

and services available in the market. This practice is expensive, but considerable evidence
indicates that many consumers are willing to
pay a premium to be protected against their
own bad habits (Juster and Shay, 1964;
Katona, 1975). Consumers have also used
other types of contractual arrangementsfor
example, whole life insurance, lay-away plans,
and Christmas club accountsto force themselves to budget their money better. It is likely
that some consumers use payday credit to perform a similar mandatory budgeting service.
Third, considerations that make consumers
reluctant to use liquid assets may similarly
influence their utilization of credit cards.
Unused credit limits on credit cards are an
asset against which some consumers may be
hesitant to borrow. Recent evidence by Gross
and Souleles (2000) and Bird and Hagstrom
(2001) suggests that consumers maintain target levels of unused credit limits. One interpretation for this behavior is that consumers hold
some precautionary assets in the form of
unused credit limits. The subjective cost of
borrowing beyond the target levels would be
greater than the nominal interest rate. In addition, these consumers according to Katona
(1975) may be reluctant to increase credit card
debt because they fear that they will not have
the discipline to make payments on the additional debt. Using payday loans as a contractual obligation to enforce budgetary discipline
may be expensive, but perhaps less so than the
exposure of increased vulnerability to higher
debt levels over the long run.
VI. THE SURVEY

Contrary to the impression given by the

popular media, the use of payday loans among
the general population is quite uncommon. In
September 2005, responses to an omnibus survey conducted by International Communications Research indicated that just 2% of all
U.S. adults used a payday loan during the previous 12 mo.9 This is a small percentage of the
lower to moderate income consumers in early
life-cycle stages who have high demand for
credit or the credit constrained customers
who may have experienced recent loan turndown or believed that they might be turned
9. International Communications Researchs omnibus
survey, called EXCEL, is a national twice-weekly telephone
survey of about 1,000 adults, which is representative of the
adult population of the United States.

down. Many more high credit demand, credit

constrained consumers do not use payday
loans than use payday loans.
Knowledge of consumers use of payday
credit has been limited mainly to anecdotal evidence and individual companies marketing
studies. Broadly representative data have been
largely unavailable. The motivation behind the
current research was to assess whether payday
loan customers are the types of consumers that
economic theory suggests are likely to benefit
from use of high-price credit and whether their
decisions are informed and with purpose.
This article draws on a national consumer
survey, collecting data from a representative
sample of customers of companies belonging
to the industry trade association, the CFSA.
The association has more than 60 member
companies operating approximately 8,000
offices, which is just over half of the 15,000
estimated offices providing similar short-term
loans nationwide. While not necessarily representative of customers of all companies, use of
the list of customers of CFSA member companies was a cost-effective method of identifying
members of a relatively rare population.10 The
survey was a telephone interview of 427 payday customers and was conducted between
December 28, 2000, and January 9, 2001.11
VII. THE RESULTS

A. Are Payday Loan Customers Likely to

Benefit from High-Price Credit?
Payday customers economic situations are
more clearly seen when measured against
benchmarks that define different market segments. We consider three groups of high-price
credit users: finance company customers, bank
card holders who revolve balances, and customers of pawnshops.12 Finance companies
have historically provided small consumer
10. It is possible, however, that customers of CFSA
member companies may have different experiences than
those of nonmember companies. For example, because
the Associations Best Practices may set higher standards of conduct for members, customers of member companies may have fewer problems and express greater
satisfaction than those of nonmember companies.
11. For more details on survey methodology, sampling design, questions asked, response rates, etc., see
Elliehausen and Lawrence (2001).
12. Bank card revolvers are customers who make only
monthly payments on their credit cards and thus carry
a balance. In contrast, nonrevolvers pay the entire balance
each month within the payment period and do not incur
any finance charges.

LAWRENCE & ELLIEHAUSEN: ANALYSIS OF PAYDAY LOAN CUSTOMERS

loans to lower and moderate income borrowers who are relatively risky and often have
difficulty obtaining credit from banks. Bank
credit cards are of interest because bank cards
can be viewed as the established, mainstream
credit product that allows borrowing of relatively small amounts of money quickly and
conveniently. Pawnshops have historically
been a source of small amounts of credit for
marginal borrowers.
Income distributions distinguish customers
of different types of lenders, consistent with
our description above. Finance companies disproportionately serve moderate and lower
income consumers (Table 1). Bank card holders
who revolve balances are disproportionately
higher and moderate income consumers. Pawnshop borrowers are very disproportionately
lower income consumers.
Payday companies are distinct in their relatively heavy concentration in customers pre-

305

dominately having moderate incomes. A little

more than half of payday customers have family incomes between $25,000 and $49,999. This
fraction is considerably larger than the 36.8%
for clients of finance companies, the 34.5% of
bank card revolvers, 28.1% of pawnshop customers with moderate income, and 29% for the
population as a whole. Although many payday customers have lower or higher incomes,
these income groups are relatively less important to payday lenders than to other creditors.
Payday borrowers are less likely to have
incomes under $25,000 than pawnshop and
finance company customers. The requirement
that payday customers have a checking
account prevents many lower income households from obtaining payday loans since many
lower income households do not have checking accounts. Payday customers are significantly less likely than bank card holders
who revolve balances to have incomes above

TABLE 1
Summary Characteristics of Customers
Variable
Income
Less than $25,000
$25,000$49,999
$50,000 or more
Age (yr)
Less than 35
3544
4554
5564
Older than 65
Marital status
Never married
Married or living
with partner
Divorced or separated
Widowed
Has children
Education
No high school diploma
High school diploma
Some college
College degree

Payday Advance
Customers (%)

Finance
Companies (%)

Bank Card
Revolvers (%)

Pawnshops (%)

All Adults (%)

23.0
51.5
25.4

35.5
36.8
27.7

20.4
34.5
45.1

64.9
28.1
7.1

31.5
29.0
39.2

36.4
31.9
21.7
6.5
3.5

38.6
35.7
13.1
7.3
5.3

32.8
23.6
24.0
10.6
9.0

53.1
31.1
11.6
4.3a
na

23.0
24.3
19.8
13.1
19.2

16.8
57.9

14.7
64.2

15.3
62.9

32.6
38.2

16.3
60.9

23.0
2.4
65.3

35.8
10.3
73.8

15.2
6.7
57.1

29.2b
na
na

13.8
9.1
48.4

6.2
38.3
36.1
19.4

14.9
48.1
22.5
14.6

3.7
29.7
28.2
38.5

17.1
38.1
35.8
9.0

9.7
34.3
21.1
34.9

na, not available.

a
Older than 65.
b
Includes widows.
Sources: Bank card and all adults data are from the Survey of Consumer Attitudes (January 2000). Pawnshop data are
from Johnson and Johnson (1998). Data are for active borrowers. Finance companies data are from Survey of Consumer
Finances (1998).

306

CONTEMPORARY ECONOMIC POLICY

$50,000. As discussed below, many payday

customers do not have bank credit cards or
have borrowed fully against their credit limits
if they have bank credit cards.
Consistent with the predictions of the economic model, customers of these high-price
credit sources are disproportionately young.
Two-thirds of the payday customers are younger than 45 yr, and 36.4% younger than 35 yr,
compared to 47.3% and 23.0% of the population, respectively. Payday customers are younger than bank card revolvers but not as
youthful as pawnshop borrowers or customers
of finance companies. Just over half of bank
card holders are under age 45 and 32.8% are
under age 35. Eighty-four percent of pawnshop borrowers are under the age of 45, with
53.1% under age 35; and 74.3% of finance
company borrowers are under age 45. Relatively few payday customers are old. One in
10 payday borrowers age is 55 yr or older,
compared to one-third of the population.
When older consumers use high-price
credit, they are more likely to use a bank card.
Two in 10 of all bank card holders who revolve
balances are aged 55 or above. It is noteworthy
that the percentage of bank card customers
who revolve balances is considerably greater
than that for customers of other high-price
lenders but much less than the proportion
55 or older in the population. This finding is
consistent with hypotheses about consumer
credit use. Consumers in early life-cycle stages
tend to have a high demand for credit, which
may be satisfied by less traditional forms of
credit. In general, payday customers are younger than bank card holders, suggesting that
payday loans and credit cards may not be
substitutes for some customers. Of all the
high-price credit customer groups, the age distributions of payday and finance company
customers are the most similar.
More than half of payday customers are
married or living with a partner, and nearly
a quarter are divorced or separated. Sixty-five
percent of payday customers have children
younger than 18 yr living in the household.
The concentration of payday customers in
families and in younger age groups indicates
that payday customers generally are in lifecycle stages in which demand for credit tends
to be high. Finance company customers, and
to a lesser extent consumers who revolve bank
cards, are also disproportionately married
(including living as married) or divorced

(including separated) and have children in

the household. Although the greater proportion of pawnshop borrowers are married/
living as married or divorced/separated, a
third of pawnshop borrowers were never
married, a much larger proportion than those
of the population or the other customer
groups. The disproportionate percentage of
never-married consumers among pawnshop
borrowers differs from payday, finance company, and bank card borrowers.
Nearly all payday customers borrow
money from other sources. As reported in
Table 2, fully 91.6% of payday customers also
rely on other types of consumer credit. They
disproportionately use closed-end consumer
credit. Fifty-three percent of payday customers had auto loans compared to 33.5% of the
population, and 36.6% had other closed-end
consumer loans compared to 21.4% of the
population. In contrast, payday customers
are less likely than the population overall to
use revolving credit. Fifty-seven percent of
payday borrowers have bank cards compared
to 72.5% of the population, and 21.5% have
retail cards compared to 56.8% of the population. Not only are payday customers more
likely than the population as a whole to use
consumer credit, but they are also more likely
to have higher debt service burdens when they
use consumer credit. Twenty-seven percent of
payday customers have monthly debt payments of 20% or more of income compared
to 9.8% of all adults.
Payday customers have relatively low usage
of mortgage credit, reflecting their lower rate
of home ownership. This finding provides further support for the hypothesis that payday
customers limited resources cause them to
be rationed. By far most payday customers
who do own homes, like homeowners overall,
have mortgages.
Perhaps because of their limited resources
and relatively heavy use of credit, payday customers often experienced limitations on additional credit use.13 As reported in Table 2,
73% of payday customers reported loan turndowns or limitations in the previous 5 yr.
This percentage is over three times the percentage of turndowns and limitations for the
13. Relatively high debt burdens likely contributed to
financial problems. A quarter of payday customers had
late payments of 60 d or more in the past year compared
to 5.8% of all adults (numbers not in table). See Elliehausen and Lawrence (2001).

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307

TABLE 2
Use of Selected Types of Credit
Variable
A. Consumer credita
Open-end consumer credit
Bank cards
Retail cards
Closed-end consumer credit
Auto loans
Other
Memo: consumer
debt payments 20% or more
of monthly income
B. Mortgage credit
Home equity
line of credit
Other mortgage
Memo: own home
C. Credit request turned down
or limited in past 5 yr

Payday Advance
Finance
Bank Card
Customers (%) Companies (%) Revolvers (%) Pawnshops (%) All Adults (%)
91.6

100.0

100.0

na

82.4

56.5
21.5

53.3
51.8

100.0
76.8

53.4
37.7

72.5
56.8

52.9
36.6
27.4

55.4
76.5
30.8

48.5
8.2
20.0

na
na
na

33.5
21.4
9.8

6.8

4.6

9.3

na

7.9

32.0
41.7
73.0

48.0
64.8
na

59.9
73.5
na

na
34.8
na

46.0
63.3
21.8

Includes nonrevolving use of bank or retail card.

Sources: Bank card data are from the Survey of Consumer Attitudes (January 2000). Pawnshop data are from Johnson
and Johnson (1998). Finance company data are from Survey of Consumer Finances (1998).

population as a whole and is further evidenced

that payday customers are rationed. Thus,
most payday customers are in income and
family lifecycle groups that tend to have high
demand for credit. Their actual credit use is
consistent with this expectation. Nearly all
payday customers use other forms of credit,
and many allocate a relatively large percentage
of their monthly income to service the debt.
And well over half of payday customers
recently experienced limitations to additional
credit use. These are precisely the characteristics that may justify use of high-price credit to
relax credit market constraints.14
These credit use characteristics also
describe users of other high-price credit products. Finance company and bank card borrowers were also more likely than the
population to have consumer debt payments
of 20% or more of monthly income (Table 2).
Like payday customers, finance company borrowers disproportionately have auto loans
and other closed-end consumer loans. Bank
card borrowers are more likely than the population as a whole to have auto loans but dis14. In a preliminary study, Hanson and Morgan
(2005) found evidence that payday lending loosened credit
constraints without increasing credit delinquencies, results
that support the theoretical prediction that high-price
credit may be wealth increasing.

proportionately use revolving credit instead of

other closed-end credit. Finance company and
bank card borrowers may represent more
mature segments of the high-price credit market than payday borrowers, as suggested by
their home ownership rates. Greater percentages of loan turndowns and limitations of
finance company and bank card borrowers
than the population supports the hypothesis
that finance company and bank card borrowers too are often rationed.

B. Are Payday Loan Customers Decisions

Purposive and Informed?
Cognitive models describe the decision process as a series of stages in which consumers
recognize a need, gather information, evaluate
alternatives, make a decision, and evaluate the
decision (Engel, Blackwell, and Miniard,
1997; Katona, 1975). The process is influenced
by product characteristics, consumer characteristics, and situational factors. Research has
identified influences that tend to extend decision processes or lead consumers to omit steps.
Product Characteristics. Research on consumers decisions indicates that the products
that are high priced relative to income or

308

CONTEMPORARY ECONOMIC POLICY

commit the consumers for an extended period

of time tend to be associated with extended
decision processes. Although the cost of payday loans is large relative to the size of the
loan, the cost of payday loans is small relative
to most customers monthly budgets. And the
typical term of 1014 d until the next payday is
relatively short. These two characteristics of
the product suggest that the decision process
for payday loans may not be particularly
extensive.
Consumer Characteristics. Consumers with
higher levels of education are more likely to
have extended decision processes than those
with lower levels of education. This observation may be attributed to greater cognitive
ability and efficiency in search. For consumer
credit, higher levels of education are associated with greater awareness of APRs and
finance charges (Durkin and Elliehausen,
1978; Shay and Brandt, 1979). Awareness does
not necessarily mean that consumers use the
information, but a lack of awareness suggests
that the information was not very important in
the decision process. Payday customers are
concentrated in the middle levels of educational achievement. As shown in Table 1,
38.3% of payday consumers have high school
diplomas and 36.1% have some college. Evidence indicates that the majority of consumers
in these education groups are aware of APRs
for the different types of credit they use.
The survey questioned payday customers
about the cost of their most recent new payday
loan. Nearly all customers reported a finance
charge. Ninety-one percent of customers
reported a finance charge that was within
the range of market rates for payday loans,
which suggests that these customers were reasonably aware of the finance charge (numbers
not in table).15 In contrast, payday customers
were not aware of the APR for their most
recent payday loan. Seventy-eight percent of
customers recalled receiving information on
the APR, which customers received in Truth
in Lending disclosures. Only one in five of
these customers could recall the rate, however.
And more than half reported rates that were
too low to be consistent with the range of market rates. Clearly, these responses show that
payday customers considered the finance
15. See Durkin (2000) for a discussion on the use of
awareness zones to assess consumer knowledge.

charge, not the APR, as the cost of the loan.

It is notable that the payday customers awareness of finance charges for such credit is
among the highest levels of awareness of cost
for any credit product.
Despite the low dollar amount of the
finance charge, payday customers do not perceive the cost of payday loans as less expensive
than some of the costs they may be trying to
avoid. Nearly half of payday customers said
that payday loans were more expensive than
returned check fees (Table 3). Similarly,
40.8% of customers said that payday loans
were more expensive than late fees for mortgage or rent, and 33.5% said that payday loans
were more expensive than late fees on credit
cards or other consumer debts. These percentages ranged from nearly two times higher for
returned check fees to a little more than a third
higher for late payments for credit card and
other consumer debt than the percentages saying that payday loans were less expensive.16
That consumers might turn to payday loans
to avoid the stigma of returned checks or late
fees despite payday loans perceived high cost
is understandable. Electronic databases like
ChexSystems make payment using checks difficult for those with a history of bouncing
checks (Beckett, 2000), and late payments on
debts make future borrowing from mainstream
lenders expensive or possibly even unavailable.
In sum, nearly all payday customers
recalled the finance charge on their most
recent payday loan reasonably accurately.
By far, most customers had perceptions of
the cost of payday loans relative to fees that
payday loans are often used to avoid, and
many perceived payday loans to be relatively
expensive. These findings suggest that customers may weigh costs of alternatives in their
decisions. That such fees are generally stated
as dollar amounts or add-on rates rather than
APR equivalents may explain why customers
recalled the finance charge rather than the
APR for their most recent payday loan.
Situational Factors. Use of payday loans is
determined more by unplanned events than
16. Percentages of customers responding that they did
not know whether payday loan costs were more or less
expensive than returned check or late fees were small.
Most payday customers had experiences with these types
of fees. Sixty-eight percent of customers had written
checks later returned for insufficient funds in the past year,
and more than a quarter had made late payments of
60 d or more on debts (Elliehausen and Lawrence, 2001).

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309

TABLE 3
Availability of Bank Cards and Cost of Payday Advances
Panel A: Use of Bank Credit Cards
Payday Advance
Customers (%)

All Adults (%)

56.5

72.5

39.6
33.5
13.9
13.0

37.7
29.3
13.0
20.1

25.1
20.3
54.6
60.8

48.8
20.7
30.4
na

Has bank cards

If yes, how many bank cards
One
Two
Three
Four or more
Payment practices on bank cards
Almost always pays full balance
Sometimes pays full balance
Hardly ever pays full balance
Refrained from using bank card in
past year because credit limit
would have been exceeded
Panel B: Cost of Payday Advance Relative to Cost of
Higher (%)

Same (%)

Lower (%)

Do Not Know (%)

43.6
40.8
33.5

27.6
22.0
29.0

22.3
21.6
24.4

6.6
15.7
13.1

Returned check fees

Late fees on rent (mortgage)
Late fees on credit card or other consumer debt
na, not available.

by the characteristics of the customer or the

customers financial circumstances. In the survey, nearly two-thirds of customers reported
unexpected expenses or shortfalls in income
as the reason for their most recent payday loan
sequence.17 A high debt payment burden may
make a consumer vulnerable to unplanned
events, but many, if not most, consumers with
high debt payment burdens do not experience
unplanned events that are severe enough to
cause financial distress, which might lead them
to use payday loans. When such distress occurs,
the urgency of the problem would dispose consumers to a relatively short decision process.
Consideration of Alternatives. Payday customers have few alternatives available to them.
Only 16.0% reported having sufficient funds
in checking and savings accounts at the time
of their most recent advance (numbers not in
17. This finding probably understates the importance
of unplanned events as a stimulus for using payday loans
since the survey was conducted shortly after the Christmas
holiday, a time when consumers have a relatively high
level of planned expenditures. Also use of payday loans
for planned expenses such as rent or monthly bills may
have been precipitated by earlier unplanned expenses.

table). Considering the small size of most payday loans (typically $100$300), it is likely that
payday customers have very limited liquid
assets, which provide high subjective yields.
Thirty-eight percent of customers considered
other sources, mostly depository institutions
or finance companies, instead of a payday advance. This finding is not surprising since all
customers had checking accounts and nearly
all had other consumer debt. Only a small
percentage (6.2%) considered a credit card,
although 56.5% of payday customers have
bank cards.
The infrequent consideration of bank cards
is worth additional discussion. Of payday customers having bank cards, 39.6% have only
a single bank card and another 33.5% have just
two cards (Table 3). Thus, the percentage of
payday customers having only one or two
cards is much larger than percentage of bank
card holders overall. Even if the average credit
line per card was the same for all cardholders
(unlikely), payday customers may still have
less credit availability than other bank card
holders since accounts can be added sequentially to increase the amount of available credit
(Bizer and DeMarzo, 1992). Moreover, many

310

CONTEMPORARY ECONOMIC POLICY

payday customers borrowed heavily against

their limits. As mentioned in a previous section, 60.8% of payday customers with bank
cards refrained from using a bank card in
the past year because their credit limit would
have been exceeded.
The large percentage of payday customers
without bank cards is noteworthy. Customers
ownership of bank accounts and experience
with mainstream credit suggests that bank
card holding should be higher. Past problems
may have caused some payday customers to be
closed out of the bank credit market, but subprime bank credit cards are available for many
consumers with impaired credit histories. The
expansion of bank card holding even among
lower income families suggests that availability is only part of the answer. It is likely that
many payday customers do not have bank
cards because they fear that they lack self-control to repay revolving debt. Such behavior is
often called precommitment. Katona (1975)
discussed use of credit contracts to enforce discipline and provided empirical evidence.18
More consumers have favorable attitudes
toward instalment buying than using bank
cards, and about half of all consumers believe
that the use of credit cards is bad (Durkin,
Elliehausen, and Staten, forthcoming), suggesting that many such consumers exist. Payday loans provide discipline, albeit at a high
price, because the contract requires them to
repay the entire amount at maturity.
Patterns of Use. The range in customer usage
of payday advances during the calendar year
2001 was wide. At the lower end of use, a little
more than a third of customers had four or
fewer advances, which includes both new
credit and renewals (Panel A of Table 4).
Renewals may be either a rollover, in which
the customer renews the advance by paying only
the finance charge, or a same-day advance,
where the borrower takes out another loan
on the same day he repays an outstanding
advance in full. At the high end, 22.5% of customers had a total of 14 or more payday
advances in the past 12 mo prior to the survey.
Most payday customers did not renew advances very often. A quarter of borrowers did not
18. For more recent work dealing with precommitment, see Thaler and Shefrin (1981) who developed an economic model for self-control. Bertaut and Haliassos
(2001) have applied such a self-control model to credit
card borrowing behavior.

renew any payday advance in the previous 12

mo, and 35.0% had one to two or three to four
renewals. Some payday customers did renew
frequently, however. Nine percent of customers had 913 renewals in the past 12 mo, and
10.4% had 14 or more renewals.
These statistics display a dichotomy in payday loan usage. Almost 52% of customers used
advances six or fewer times per year. But the
remaining 48% of borrowers had seven or
more advances during the year. The higher frequencies imply substantial periods of time
over which payday credit is outstanding. This
characteristic is confirmed in Panel B of
Table 4. The longest consecutive sequence of
payday advances for 27.6% of customers
was 2 wk or less, and the longest sequence
for another 29.0% of payday customers was
34 wk. However, for almost one-fifth of customers, the longest sequences were greater
than 2 mo. Nine percent of payday advance
customers had their longest sequences lasting
913 wk, and another 10.0% had sequences of
14 or more weeks. Overall, the majority of
consumers use advances infrequently or moderately. Over half of customers longest consecutive sequence of advances was a month
or less. These findings suggest that many borrowers do use payday advances regularly for
short periods of time.
A small percentage of consumers may
obtain a payday loan, repay, and not borrow
again. However, once a consumer has decided
to get a payday loan, he may well decide to use
payday loans again. Patterns of subsequent
use vary. The consumer may renew an existing
loan at his next payday because his financial
situation has not sufficiently improved to
allow him to repay the loan. Instead, the consumer may be able to repay the loan but
remains vulnerable to unplanned events.
Unexpected expenses or shortfalls in income
may occur again, and the consumer may resort
to further payday loans. This result would be
especially likely to occur if the consumer had
been satisfied with previous experience. Evidence on consumer decision processes indicates that consumers satisfied with previous
experiences often make subsequent purchases
without additional deliberation or consideration of alternatives (Engel, Blackwell, and
Miniard, 1997). Evidence in Panel A of
Table 4 indicates that subsequent use varies
from a small number of payday loans during
the past year to 14 or more payday advances.

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311

TABLE 4
Usage of Payday Advances
Panel A: Total Number of Advances, New Advances, and Renewals in the Past 12 mo

None
12
34
56
78
913
14 or more

Total Advances (%)

New Advances (%)

Renewals (%)

15.6
19.2
16.9
10.3
15.6
22.5

35.5
31.4
15.3
7.0
6.7
4.2

25.1
21.1
13.9
10.4
9.6
9.4
10.4

Panel B: Length of Longest Sequence of Consecutive Advances in the Past 12 mo

2 wk or less
34 wk
56 wk
78 wk
913 wk
14 or more weeks

27.6
29.0
10.4
14.5
8.6
10.0

Panel C: Use of Different Payday Advance Companies in the Past 12 mo

Used more than one company

Number of companies used
Two
Three
Four or more
Paid off one company with
proceeds of an advance
from another company

Payday Advance
Customers (%)

Customers using More

Than One Company (%)

47.0

100.0

30.0
11.1
5.9
16.5

63.7
23.6
12.6
35.2

Assuming a 2-wk average term, this amounts

to owing payday advances for half of the year
or longer.
Forty-seven percent of payday borrowers
obtained credit from more than one company
(Panel C of Table 4). Of the customers using
more than one company, 63.7% used two,
23.6% three, and 12.6% four or more lenders.
One motive for using more than one company
appears to be to extend the period of time over
which the debt is outstanding. A little more
than a third of customers who used more than
one firm obtained an advance at one company
to pay off a loan at another company at least
once during the previous 12 mo. The remaining two-thirds used more than one company
for other reasons. Some customers may use
multiple payday companies sequentially like
using different credit cards to increase the
amount of debt or availability of credit (Bizer
and DeMarzo, 1992). Customers may also
select different companies because the location

of each company may be convenient at different times. The small dollar amounts of the
finance charge and expected benefits for most
payday transactions probably do not justify
incurring much transportation cost.
Post-Purchase Evaluation. Overall, the survey
respondents had very favorable attitudes
toward payday companies. By far, most survey respondents were satisfied with their most
recent new payday advance. Forty-two percent of customers were very satisfied with their
most recent new advance, and 33.0% were
somewhat satisfied (Table 5). Only 12.2% of
customers expressed any level of dissatisfaction, about half of whom were very dissatisfied. The survey instrument probed further
into the dissatisfied group to ascertain the reason for their discontentment. High cost was
overwhelmingly the reason for customers
dissatisfaction. A high interest rate was the
most frequently mentioned item, with 30.8%

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CONTEMPORARY ECONOMIC POLICY

of dissatisfied customers mentioning this reason. A high finance charge or just high cost
was also frequently cited (9.6% and 21.2%,
respectively). In total, 61.6% of disgruntled
customers mentioned some aspect of cost as
a reason for the dissatisfaction. Other specific
problems were infrequent. Collection problems were mentioned by 7.7% of dissatisfied
customers. Insufficient or unclear information
was each cited by 3.9% of respondents. And
only 1.9% of these borrowers mentioned difficulty in being able to get out of debt as the reason for their dissatisfaction.
Customers satisfaction with their most
recent advance is reflected in their positive attitudes toward payday advances generally and
their opposition to proposals for regulation
that directly restricts availability. As shown
in Table 6, approximately 92% of borrowers
strongly agreed or somewhat agreed with
the statement Payday advance companies
provide a useful service to consumers. Three
percent of customers somewhat disagreed that
payday companies provide a useful service,
and only 4.7% strongly disagreed. The overwhelmingly favorable response to this statement
provides evidence that payday companies serve
a real economic need for their customers.
One proposal for regulation would limit the
number of payday loans a consumer can take
TABLE 5
Satisfaction with Most Recent New Advance
Level of Satisfaction
Very satisfied
Somewhat satisfied
Neither satisfied nor dissatisfied
Somewhat dissatisfied
Very dissatisfied
Total
If dissatisfied, the reasons
for dissatisfaction
High interest rate
High finance charge
High cost, not ascertained
whether finance charge
or interest rate
Collection problems
Insufficient or unclear information
Not able to renew or extend
Too difficult to get out of debt
Other
Total

Customers
Responding (%)
42.2
33.0
12.5
6.3
5.9
100.0

30.8
9.6
21.2

7.7
3.9
3.9
1.9
21.2
100.0

out in a year in order to address the alleged

problem that consumers end up using payday
advances as long-term credit. When asked
about such a limitation, more than two-thirds
of payday customers strongly disagreed or
somewhat disagreed. Another proposed remedy to this alleged problem would limit the
number of times a payday loan can be renewed
without a break. Responses to this proposal
were similar to the previous one. Sixty-two
percent of borrowers strongly disagreed or
somewhat disagreed that the number of consecutive renewals should be limited.
A form of regulation with which customers
generally agreed was limiting the fees payday
lenders are allowed to charge. Three of four
customers strongly agreed or somewhat
agreed that the government should regulate
the fees charged by payday companies. Considering the very favorable attitude toward
payday advances and opposition to limiting
the number of payday loans, it is likely that
few of these customers would agree to new
limits if they were personally prevented from
obtaining credit. Instead, this attitude of
favoring price regulation seems to reflect a general sentiment that payday borrowers would
prefer lower prices as well as a lack of understanding of the role of competition in limiting
prices or the effects of binding constraints on
credit availability. Such feelings are widespread and not unique to payday lending.
Durkin (2000), for example, found bank card
holders expressing similar opinions that credit
card interest rates were too high.
VIII. FURTHER EXPLORATORY ANALYSIS

Frequent use of payday loans is not generally associated with customers financial characteristics, but there are a few exceptions. We
estimated logistic regressions to predict frequent use of payday loans, defined as 14 or
more payday loans during the past year, as
a function of customer and financial characteristics.19 The results, presented in Table 7,
are representative of the findings. The estimated regression was statistically significant,
but only a few characteristics were statistically
significant. Past payday use (measured by use
19. Explanatory variables included the variables
reflecting attitudes toward credit; family life-cycle stage
and income; knowledge, awareness of credit costs, and
financial experience; and financial management skills
and behavior.

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313

TABLE 6
Attitudes Toward Payday Advances

Payday advance companies provide

a useful service to consumers
The government should limit the number
of payday advances one can get in a year
The government should limit the number
of times a payday advance can be
renewed without a break
The government should limit the fees
charged by payday advance companies

Strongly
Agree (%)

Somewhat
Agree (%)

Somewhat
Disagree (%)

Strongly
Disagree (%)

Do Not
Know (%)

53.9

38.2

2.8

4.7

0.5

17.1

12.4

18.7

50.4

1.4

19.7

16.6

18.7

42.9

2.1

55.5

19.7

11.5

11.9

1.4

of payday loans for more than 2 yr) was positively related to frequent use. Favorable attitudes toward credit (measured by agreement
with the statement that most people benefit
from the use of credit) were negatively related
to frequent use. These findings suggest that
frequent users have long-term difficulty in
managing finances and their less favorable
attitudes toward credit reflect difficulties in
handling credit.
Logistic regressions also show that frequent
bank card revolvers (bank card holders
who hardly ever pay in full) are less likely
to be frequent payday loan users than customers who revolve sometimes or customers who
do not have revolving credit accounts. However, bank card holders who did not use bank
cards during the past year because the limit
would have been exceeded were more likely
to be frequent users. Thus, bank card credit
appears to be a substitute for payday loans,
but customers frequently resort to payday
loans when revolving credit is no longer
available.
Demographic characteristics of customers
generally were not significant. This finding is
not because of intercorrelation among explanatory variables. These variables did not distinguish between frequent and less frequent
use.20 For example, college graduates were
nearly equally represented among frequent
and less frequent users (23% and 21%, respectively), and the difference in the percentage of
blacks among frequent and less frequent users
(29% and 22%, respectively) is relatively small.
20. Results were not very sensitive to model specification. A favorable attitude toward credit, long-term use,
and the two bank card variables discussed above were
almost always significant. Except for two life-cycle variables, demographic variables were hardly ever significant.

Demographic variables had little predictive

value. Only two life-cycle variables were statistically significant in some regressions (not
reported in Table 7). Younger customers
(age less than 45 yr) without children were less
likely to be frequent users than customers with
children, and older customers without children were more likely to be frequent users.
The finding that younger customers without
children were less likely to be frequent users
is consistent with theoretical expectations
about demand for high-price credit. Older customers without children are small percentage
of payday loan customers (and, as mentioned,
much less likely to be payday loan borrowers
than their proportion in the population).
However, the regression models suggest that
those who do use payday loans may have
financial difficulties that cause them to use
payday loans frequently.
Awareness about payday loan costs is not
significantly related to frequency of use. This
result is not unexpected. Since almost all customers were aware of the finance charge for
their last payday loan, awareness of the
finance charge did not distinguish frequent
from infrequent borrowers (numbers not in
table). Customers who were aware of the
APR for the last payday loan (about a fifth
of customers) were not significantly less likely
to use payday loans frequently than those who
were unaware of the APR. Late payments on
other credit obligations in the past year were
not significantly related to frequency of use
nor were returned checks. These problems
were common for frequent and less frequent
users. More detailed information on the extent
of customers financial circumstances, which
might distinguish frequent from less frequent
users, was not available.

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CONTEMPORARY ECONOMIC POLICY

TABLE 7
Logistic Regression Predicting Frequent Use of Payday Loans
Variable

Mean

Coefficient (SE)

Agree that most people benefit from use of credit (dummy variable)
Agree that overspending is the fault of consumers (dummy variable)
Agree that too much credit is available today (dummy variable)
Agree that payday loan companies provide a useful service
(dummy variable)
Less than 45 yr of age, no children (dummy variable)
45 yr of age or older, has children (dummy variable)
45 yr of age or older, no children (dummy variable)
Family income less than $25,000 (dummy variable)
Family income $50,000 or more (dummy variable)
Education less than high school diploma (dummy variable)
College degree (dummy variable)
Aware of APR for last payday loan (dummy variable)
Credit union member (dummy variable)
Used payday loans for more than 2 yr (dummy variable)
Had savings that could have been used instead of payday loan
(dummy variable)
Had returned checks in past 12 mo (dummy variable)
Had late payments on mortgage or consumer debts in past 12 mo
(dummy variable)
Had bankruptcy in past 5 yr (dummy variable)
Has bank cards, usually pays balances in full (dummy variable)
Has bank card, hardly ever pays balances in full (dummy variable)
Does not have revolving credit account (dummy variable)
Credit request turned down or limited in past 5 yr (dummy variable)
Did not use a bank card in past 12 mo because credit limit would
have been exceeded (dummy variable)
Thought of applying for credit in past 5 yr but did not because feared
turndown (dummy variable)
Black (dummy variable)
Hispanic (dummy variable)
Female (dummy variable)
Intercept
Memo
Number of observations
Mean of dependent variable
Likelihood ratio
Degrees of freedom

0.820
0.808
0.558
0.924

0.863
0.599
0.187
0.199

(0.409)**
(0.429)
(0.320)
(0.594)

0.177
0.050
0.180
0.227
0.252
0.054
0.215
0.120
0.476
0.180
0.155

0.783
0.248
0.538
0.320
0.137
0.314
0.238
0.108
0.107
1.592
0.298

(0.515)
(0.703)
(0.392)
(0.399)
(0.390)
(0.636)
(0.393)
(0.475)
(0.331)
(0.371)***
(0.474)

0.129
0.208

0.408 (0.440)
0.082 (0.391)

0.155
0.138
0.287
0.385
0.730
0.338

0.093
0.469
1.675
0.055
0.171
0.737

0.700

0.613 (0.391)

0.240
0.054
0.552
1.000

0.300
1.741
0.465
2.497

(0.428)
(0.552)
(0.514)***
(0.467)
(0.416)
(0.452)*

(0.360)
(1.104)
(0.339)
(0.065)***

317
0.237
60.976
27

Notes: Means may differ from statistics reported elsewhere because of missing values in variables used in logistic regressions.
*Significantly different from zero at the 10% level; **significantly different from zero at the 5% level; ***significantly
different from zero at the 1% level.

How long consumers continue to use payday loans is not documented. Most consumers
having high debt payment burdens at a point
in time repay debts or receive increases in
income, which reduce debt payment burdens
and vulnerability to financial distress.21 These
consumers may use payday loans, perhaps fre21. For evidence on persistence of high debt payment
burdens, see Avery, Elliehausen, and Kennickell (1987).

quently, for a short time period and then stop

using it. Other consumers may lack selfcontrol or have poor financial management
skills that cause them to live from paycheck
to paycheck for extended periods of time.
Some payday customers appear to have this
characteristic. A fifth of payday customers
responding to the survey had used payday
loans for periods of time longer than 2 yr
(numbers not in table).

LAWRENCE & ELLIEHAUSEN: ANALYSIS OF PAYDAY LOAN CUSTOMERS

XI. CONCLUSIONS

Despite being a relatively new and innovative form of consumer lending, the payday
advance transaction is growing in popularity.
Nevertheless, this type of borrowing is highly
controversial and not yet well understood.
Critics charge that payday companies conduct
predatory lending that takes advantage of
lower income groups that lack lower price
alternatives. Industry representatives counter
that these services provide real economic benefits to borrowers and meet an unsatisfied need
for small consumer loans ignored by more traditional lenders. Regardless of which view one
holds, there is no question that the rapid
growth of the payday industry demonstrates
a strong consumer demand.
This article expands our limited knowledge
of payday lending by adopting a standard economic model of consumer credit use. Drawing
on an extensive national survey, the evidence
indicates that payday customers are predominately the early life-cycle, moderate income,
credit constrained consumers, which economic
theory suggests may benefit from relaxation
of credit constraints through use of high-price
credit.
A cognitive model of decision making is
then used to assess the customers decision
process. The survey shows that nearly all borrowers were aware of the high finance charge
for payday credit but not the APR. Their
awareness of the cost of payday advances relative to returned check and late payment fees
that payday advances are often used to avoid
suggests that customers may weigh costs of
alternatives in their decisions. That such fees
are generally stated as dollar amounts or
add-on rates rather than APR equivalents
may explain why customers recalled the
finance charge rather than the APR for their
most recent payday loan.
Most customers used other types of consumer credit and therefore have previous experience with credit and creditors. Many have
levels of education that are associated with
awareness of APRs for different types of consumer credit. A large percentage considered
alternatives to payday loans; however, evidence suggests that many customers may have
had difficulty obtaining additional credit from
mainstream lenders, especially on an unsecured basis. Most customers used payday
advances only a few times during the past year,

315

typically for less than a month at a time. Thus,

the behavior of customers was generally consistent with the intended use of the product,
and customers were aware of the price of
the product and showed signs of deliberation
in their decision to use payday advances.
These findings suggest that payday advances give consumers a little control over their
financial affairs they otherwise would not
have. This may explain customers positive
attitudes toward payday loans and high levels
of satisfaction, despite the high cost relative to
loan size compared to other forms of traditional credit.
As is often the case, opportunity for some
consumers may be accompanied by harm to
others. A relatively small percentage of high
frequency users rely on payday loans for an
extended period of time. This behavior is
not necessarily harmful because some consumers may need a longer period of time to
improve their situation. However, reliance
on payday loans for an extended period of
time seems contrary to the short-term financing intention of the product and may exacerbate rather than relieve financial problems
some consumers face. More research needs
to be conducted on this important subgroup
of payday customers.
For the critics of the payday loan industry,
totally curtailing payday lending may actually
be a more harmful public policy for some lowand middle-income people who lack viable
alternatives in a moment of great need. The
majority of payday customers do not abuse
the short-term nature of this form of lending
and use it appropriately. Furthermore, as the
online gaming industry has recently demonstrated, banning a service locally that is in
demand only drives the business offshore
without government regulation and no taxes.
To address concerns about prices, public policy should be concerned with eliminating
barriers to entry and promoting competition
rather than limiting prices or otherwise
restricting availability.

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