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Publication Date

February 2003

Author(s)

Michael A. Stegman, Robert Faris

Researchers examine the explosive growth of payday lending as a source of short-term consumer credit in low-income communities and the high incidence of perpetual indebtedness of payday borrowers.

The tremendous growth in the demand for very small, short-term loans by credit constrained households is being largely filled by companies offering payday loans.

This article explores the explosive growth of payday lending as a source of short-term consumer credit in low- and moderate-income communities, with a special emphasis on the relationship between industry business practices and the high incidence of perpetual indebtedness in which an increasing number of payday borrowers find themselves.

Empirical analysis confirms two related truths about payday lending. First, there is no denying the large and growing demand for this consumer credit and the rapidly expanding network of companies willing to supply it. Second, despite its expanding customer base and notwithstanding industry denials, the financial performance of the payday loan industry, at least in North Carolina, is significantly enhanced by the successful conversion of more and more occasional users into chronic borrowers.


Topics(s): Consumer Protections, Debt & Credit, Financial Inclusion, Financial Services Industry