Determinants of Short-term Consumer Lending Interest Rates

Richard Evans

No 2012-07, BYU Macroeconomics and Computational Laboratory Working Paper Series from Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory

Abstract: One of the most striking characteristics of the short-term consumer lending industry is the high level of interest rates. This study tests a theory of consumer lending interest rates in which fixed processing costs of short-term loans are the main determinant of interest-rate levels. I perform empirical tests using store-level data from payday and title lenders in the State of Utah from 2010, combined with zip-code level socioeconomic data from the U.S. Census Bureau and the Internal Revenue Service representing potential borrowers. I find that competition among lenders reduces average interest rates and that riskiness of borrowers, as measured by defaults, increases average interest rates. I also fnd that short-term consumer interest rates have a nonlinear and significant relationship to average income, consistent with anecdotal evidence from the payday lending industry but inconsistent with the hypothesis that short-term consumer lenders prey upon the poor. Lastly, I find no evidence that race or eduction affect the short-term lenders' interest rates.

Keywords: Consumer lending; interest rates; payday lenders (search for similar items in EconPapers)
JEL-codes: D91 E43 G29 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2012-08
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:byu:byumcl:201207

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