Survey data on 400 payday loan users collected before and after the imposition of an interest-rate cap in Oregon suggest that the cap caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms, rather than helps, consumers.
The study, conducted by Prof. Jonathan Zinman of Dartmouth College, seeks to evaluate the effects of interest-rate and loan-term restrictions imposed by the State of Oregon in 2007. Previously, payday lenders had been charging borrowers at least $15 per $100 for two-week loans; effective July 1, 2007, the maximum finance charge that can be imposed on Oregon borrowers is approximately $10 per $100, with a minimum loan term of 31 days. The effective yield to lenders was reduced by two-thirds as a result of the new regulatory scheme.
Most payday lenders have exited Oregon following the cap, and the study finds that payday borrowing has fallen dramatically as a result. It also finds evidence that some former payday borrowers turned to alternatives that can be even more costly than payday loans, such as overdrafts and late bill payments.
The study estimates the effects of the Oregon cap by comparing changes in key aspects of household finances before and after the effective date of the cap, using comparable households in Washington state (which retained consistent regulation) as a “control.” The study covers changes from late June 2007 to early December 2007.
The most important finding in the study is that, relative to their Washington counterparts, the Oregon households were far more likely to experience a change for the worse in the key financial outcomes measured by the survey: job status and respondents’ assessments of their recent and future financial situation. These results suggest that restricting access to payday loans harmed Oregon respondents over the term of the study.
“Like some other studies, these results suggest that access to credit, even if expensive, can help some people make productive investments and help others manage their cash flows through emergencies,” Prof. Zinman said. “There’s more work to do to reconcile these results with findings from other studies that suggest access to expensive credit can exacerbate financial distress.”
The data collection for the study was funded by a grant from Consumer Credit Research Foundation, which did not participate in the analysis of the data or the drafting of the study.
The complete working paper on the study is available online at http://www.dartmouth.edu/~jzinman/Papers/Zinman_RestrictingAccess_oct0 8.pdf. (Due to its length, this URL may need to be copied/pasted into your Internet browser’s address field. Remove the extra space if one exists.)