Abstract:
The payday loan industry is a highly debated provider of alternative financial services (AFS). The varied regulations implemented across states which include finance charge regulation, loan term regulation, loan amount regulation, and bans attempt to shift consumers away from this industry to mainstream credit options that increase consumer welfare in the long-run. Using the Current Population Survey Unbanked/Underbanked Supplement from 2009 and 2011, I analyze the effectiveness of each type of legislation that exists across states in these years. Looking at payday loan use, alternative financial service use to cash checks, and alternative financial service use to take out a money order within the year preceding the survey, I find that finance charge regulations are most effective in shifting consumers away from payday loans and maximum loan term and fee regulations are most effective in shifting consumers away from AFS for money orders. Looking at demand side effects, I find that finance charge regulations are effective because they reduce the probability that a consumer finds payday loans more comfortable, more convenient, or easier to get than bank loans.
