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Payday loan regulations

Health Factors: Income
Decision Makers: Local Government State Government
Evidence Rating: Insufficient Evidence
Population Reach: 50-99% of WI's population
Impact on Disparities: Likely to decrease disparities

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Description

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

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. 

Implementation

United States

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).

Wisconsin

Wisconsin allows payday lending, with restrictions on fees, interest rates, and maximum liabilities, in state statutes 138.14 and 2013 Act 20 (NCSL-Payday lending statutes).

Implementation Resources

CRL - Center for Responsible Lending (CRL). State of lending: Payday loans. Accessed on December 10, 2015
NCSL-Payday lending statutes - National Conference of State Legislatures (NCSL). Payday lending statutes. Accessed on November 24, 2015

Citations - Description

Stegman 2007 - Stegman MA. Payday lending. Journal of Economic Perspectives. 2007;21(1):169–90. Accessed on November 23, 2015

Citations - Evidence

Bertrand 2011* - Bertrand M, Morse A. Information disclosure, cognitive biases, and payday borrowing. Journal of Finance. 2011;66(6):1865–93. Accessed on December 1, 2015
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. Accessed on December 1, 2015
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. Accessed on November 23, 2015
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. Accessed on November 23, 2015
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. Accessed on November 24, 2015
Morse 2011* - Morse A. Payday lenders: Heroes or villains? Journal of Financial Economics. 2011;102(1):28–44. Accessed on November 24, 2015
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. Accessed on December 30, 2015
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. Accessed on November 24, 2015

Citations - Implementation

NCSL-Payday lending statutes - National Conference of State Legislatures (NCSL). Payday lending statutes. Accessed on November 24, 2015

Page Last Updated

May 7, 2014

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