Understanding Non-Prime Borrowers and the Need to Regulate Small Dollar and “Payday” Loans

Proponents of more stringent oversight of American “payday” lenders focus on the negative outcomes of payday loans for consumers, who often find themselves in “debt cycle traps.” Opponents of regulation stress the need for short-term credit for those who don’t qualify for traditional loans at lower interest rates. Regulators must begin by understanding the users of payday loans. While conventional wisdom holds that these customers are “unbanked,” borrowers must in fact maintain bank accounts to be eligible for payday loans. They also must provide evidence that they generate income. One in three users of payday loans owns a home, while one in...