Straight on the heels of newly approved regulations that effectively ban payday lending services in Ohio, a study released today from Dartmouth College demonstrates that a 2007 cap on short-term payday loans in Oregon has substantially harmed borrowers there. The study shows why anti-payday activists are so misguided, and reinforces what we have been saying all along: Limiting credit access harms consumers.
Economist Jonathan Zinman found that when payday lenders left the state, Oregonians had to turn to alternatives that were all more costly than the short-term loans:
I find that the Cap dramatically reduced access to payday loans in Oregon, and that former payday borrowers responded by shifting into incomplete and plausibly inferior substitutes. Most substitution seems to occur through checking account overdrafts of various types and/or late bills. These alternative sources of liquidity can be quite costly in both direct terms (overdraft and late fees) and indirect terms (eventual loss of checking account, criminal charges, utility shutoff).
Zinman compares his statistics on households in Oregon to those in Washington (where short-term payday loan services remained intact) and found that “the Oregon households were far more likely to experience a change for the worse in the key financial outcomes.”
Especially in a time when more and more Americans are struggling to gain access to short-term credit, payday lenders have filled a void and helped consumers bridge temporary gaps in their finances. Zinman’s findings even showed that the majority of respondents took out payday loans for “bills, emergencies, food/groceries, and other debt service.” Only 6 percent used payday loans for “shopping or entertainment.”
It doesn’t take an economist to understand that, for many, paying $15 for a two-week $100 loan is better than pawning a family television or bouncing checks. Sadly, Nanny State lawmakers and bureaucrat-knows-best activists have already eliminated that choice for Oregonians and Ohioans, and are pushing to further eliminate this valuable financial option across the country.