Eyebrows raise when you hear about any interest rate on credit more than 30 percent. If you're discussing payday or title lending, the implied interest rates (in annual percentage rate) can be above 500 percent. Put in those terms, short-term consumer lending markets sound immoral and predatory.
With a first impression like that, it is no surprise that the short-term consumer lending industry is often the target of restrictive regulation proposals and public ire.
However, looking more closely suggests that these loans are smaller in both total market size and individual interest expense than the APR interest rate would suggest. And these markets receive fewer complaints from their users than any other lending industry.
In a new dataset collected during summer 2011, I surveyed all of the Utah payday and title lending firms, as well as some pawn lenders. The data include average interest rates (in APR), average loan amounts, average duration of loan, default rate and total principle lent for more than 50 percent of all the payday and title lending store locations in Utah.
A response rate of more than 50 percent makes this survey one of the most representative of its kind. The dataset also contains a level of detail that no other source in the state has available.
The first gems that emerge from these data are the respective sizes of the Utah payday- and title-lending markets. Payday lenders in Utah issued an estimated total of $280 million in payday loans in 2010, and Utah title lenders issued about $35 million of title loans. Compare these to the size of Utah's more traditional revolving and non-revolving credit markets of $6.4 billion and $10.8 billion, respectively, as reported in a 2009 Utah Foundation publication.
In addition to the fact that the Utah payday and title lending markets are small potatoes compared to the more traditional credit markets, they also differ in duration of loan and potential interest that can be charged.
The average Utah title loan in 2010 was $920 for 6 months with a 268 percent APR. In contrast, the average Utah household in 2007 had $13,000 of non-revolving credit and $7,700 of revolving credit, both with average interest rates of less than 25 percent. One reason for the high title loan interest rate is that 17 percent of title loan borrowers defaulted to some degree on their loan.
Utah's payday lending market is even more distinct. The average Utah payday loan in 2010 was about $410 for 17 days with a 490 percent APR. In the case of a payday loan, quoting the interest rate in an annual percentage rate can be particularly misleading. This is a two-week loan. The APR of 490 percent amounts to about a $15 fee every $100 borrowed. That $15 fee barely covers the hourly wage paid to an employee to process each loan, not to mention any increased administration costs from the 14 percent of payday borrowers who went into default to some degree on their loan.
In addition, the 490 percent payday APR represents the interest rate that would result if the payday loan were compounded for a year rather than the average of just over two weeks. Utah law prohibits payday lenders to charge interest on loans beyond 10 weeks (2.5 months). This makes the 490 percent APR a significant overstatement of interest expense charged to payday borrowers. To my knowledge, no other credit market in the country has that type of restriction.
Lastly, consumers who borrow from Utah payday or title lenders file the fewest complaints to the Department of Financial Institutions of any type of borrower. In 2010, DFI received less than 10 complaints regarding Utah payday lenders. That is likely the lowest number of consumer complaints for any Utah credit industry. This is not evidence of a population of borrowers who are being preyed upon.
In summary, this new dataset of Utah payday and title lenders provides a view of the Utah short-term consumer lending market that has not been seen before. When deciding whether government regulation of any industry is justified, a policymaker should answer the following three questions. 1) What is the market failure that the regulation addresses? 2) Do the benefits of the regulation outweigh the costs? 3) How is this industry different from other related industries that don't have the proposed regulation? This new dataset will provide more answers to the questions above regarding Utah's short-term consumer lending industry.
Richard W. Evans is an assistant professor of economics at Brigham Young University.