The maximum annual percentage rate for a $100 loan through payday lenders in Alabama
is more than 456 percent. Some rates allowed in other states are even higher.
While those numbers would seem forbidding to individuals who are struggling to make
ends meet, many are choosing the high-interest lenders over local banks offering lower
interest rates and more comprehensive services. Three Harbert College of Business professors in finance explore the reasons why in their paper, “
Banks and Payday Lenders: Friends or Foes
James Barth, John Jahera, and Jitka Hilliard (left to right) examined payday lending regulations nationwide, compared them state-to-state,
and cross-referenced this information with state demographics, including income and
Payday lending is prohibited in 13 states and the District of Columbia.
“Some people say they (payday lenders) provide a service. Yet, some states outlaw
them,” said Barth, Lowder Eminent Scholar in Finance and a Milken Institute Senior
Fellow. “It’s an issue –an important public policy issue – whether the rates they
charge should be allowed because it’s typically not rich people that use payday lenders.
That’s why we’re motivated to work on a project to better understand where payday
lenders locate and who their customers are.”
Barth, Hilliard and Jahera discovered that the South – Mississippi, Louisiana, South
Carolina, Oklahoma, Alabama and Tennessee, in particular, – has the most payday lender
stores per 10,000 people. The researchers also reported that the presence of payday
lending stores correlates to a community’s population of African Americans aged 15-and-under,
as well as the education level of its citizens.
“The correlations between the number of payday lending stores and the percentages
of the population that have high school and bachelor degrees are significantly negative,”
the researchers wrote. “Turning to the financial factors, there is a significantly
negative correlation between the number of payday lending stores and income per capita,
while a significant and positive correlation between the number of stores and the
Payday loan regulations vary from state to state. For instance, six states (Delaware,
Idaho, Nevada, South Dakota, Utah and Wisconsin) set no limit on the interest rate
that may be charged. In other words, as the paper reads, “The sky is the limit.” In
28 states, including Alabama, lenders must “explicitly specify that triple-digit rates
may be charged.”
Instead of paying high rates at a payday lender, Barth suggested the regulatory environment
be changed so that some customers are afforded the opportunity to obtain the same
services at local banks. By comparison, Alabama has 1,035 payday lending branches
to 1,571 bank branches.
“People who borrow money from payday lenders are not people who are unbanked because
to borrow from a payday lender, one needs verification that one has income and also
that one has a bank account,” he said. “Regulating payday lenders more strictly is
not the issue, but rather determining if one can impose fewer regulations on banks
so that banks can provide similar services at lower prices. Right now, banks are discouraged
-- or they are not allowed in some cases – to compete with payday lenders.
“Of course, one does not want banks to lend money to people who will not repay the
borrowed funds. On the other hand, you don’t want to tell banks that they can’t lend
to people, even risky people, because by definition – if you take the risk out of
banking, you take the profits out of banking.”
Barth will present the paper at the 78
International Atlantic Economic Conference, in Savannah, Ga., on Monday, Oct. 13.