Payday Loans versus Pawn
Shops: The Effects of Loan Fee
Limits on Household Use
Robert B. Avery
Federal Reserve Board
Katherine A. Samolyk
Consumer Financial Protection Bureau
Sept 23, 2011
The views expressed are those of the authors and do not necessarily represent
those of the Board of Governors of the Federal Reserve System or the
Consumer Financial Protection Bureau.
1
This Paper

Uses data from the January 2009 Unbanked/Underbanked
Supplement to the Current Population Survey

Examines how state-regulated fee ceilings on payday loans
and pawn shops affect households’ use of these products

Explores conjectures about market dynamics (Flannery and
Samolyk, 2007)
 Store operations involve largely fixed costs in supplying
the product
 Stores generally charge the fee ceiling rate
 If demand is relatively price inelastic (“good” a necessity,
few substitutes)
 Level of fee ceilings determines profitable scale of store
operations and number of stores needed to meet inelastic
loan demand: Quantity of loans supplied need not change
2
Findings

Demand appears to be relatively price inelastic; funds
primarily used to meet basic living expenses and lost
income

Payday loan use adjusted for demographic characteristics
does not vary systemically with fee ceilings in the range
where stores currently operate (except for the very lowest
ceilings)

Pawn shop use is higher where fee ceilings are higher

Controlling for use associated with household
demographics, stores per capita vary positively with fee
ceilings

Within a range; lower ceilings may not markedly reduce
payday loan availability
3
Payday Loans


Fairly standardized: 2 week loans of several hundred dollars,
typically 15-20$ fee per $100 borrowed
Minimal underwriting

Borrower gives lender a post-dated check for amount
borrowed and fee
 ID, recent checking account statement, and a pay stub, check
of recent payment history (Teletrak)

On maturity date, borrower pays loan or lender deposits check;
or borrower pays another fee and lender extends another loan
to the borrower
4
Pawn Shop Loans




Pawnshops loans are collateralized by the items being
pawned; LTVs in the 40-60% range.
Borrower need not have a bank account, a regular source of
income, or a credit check.
Trade groups estimate that the typical pawn loan is for about
$80, with a contract maturity of 30 days and loan fee of 20
percent of the loan amount.
If borrower does not repay or renew; the lender takes physical
possession of the item
5
State Payday Regulations



States regulate payday lending
Effective APRs generally exceed state usury
ceilings (>390% APRs)
States generally have had to pass “enabling
legislation” permitting the payday product;
regulations can include
 Fee
ceilings
 Loan amount limits
 Limits on rollovers or consecutive loans

Usury ceilings or very low payday loan fee limits
effectively “prohibit” payday lending in 13 states
and DC
6
State Pawn Shop Regulations

Pawn shops also regulated by states; regulations
can include:
 Fee limits
 The amount of time before a loan is considered
in default
 Return requirements (that sale proceeds in
excess of the loan amount and fees must be
returned to the borrower)

Pawn shops operate in all states; even those with
very low limits
7
Evidence about Customer Use

Evidence of frequent payday loan use:

Caskey (2005): state government data show most customer use payday
loans more than 6 times a year; one quarter had 14 or more loans during
the year.

Flannery and Samolyk (2007): store data from two large payday lenders:
40 percent of loans were roll-overs/renewals; roughly one half of loans
were to accounts that had taken out more than six loans that year

Skiba and Tobacman (2008) data for a large payday lender indicate half of
the borrowers default on a loan within a year of their first loan; but have
paid fees for five payday loans before they defaulted (90% of original
loan’s principal).

Evidence that payday borrowers are likely to be financially
constrained (although working, moderate income and educational
attainment)

Ellihasuen and Laurence (2001) credit card balances near limits;
outstanding balances

Logan and Weller (2009) lower wealth, more likely to have been
denied
credit
8
Evidence about Customer Use

Less known about pawn shop use:

According to Pawnshopstoday.com, “Around 80
percent of pawn loans tend to be repaid and that repeat
customers account for much of the loan volume; often
borrowing against the same item repeatedly.”
9
Evidence About Supply Side

Focal Point Pricing (DeYoung and Phillips):



Charge payday ceiling rate and compete away
excess profits by entry
Flannery and Samolyk (2007)

Stores tended to charge ceiling rates

Scale economies imply that profits related to loan
volume: more loans, bigger loans
Prager (2009)

Higher fee limits associated with more payday stores
per capita
10
Evidence About Supply Side

Higher fee limits associated with more payday stores
per capita (Caskey(1991), Prager (2009), Shackmen
and Tenney (2006))

Some evidence that pawn shops make larger loans
when ceilings are lower (Shackmen and Tenney, 2006)
11
How do fee ceilings effect availability of
payday and pawn shop loans?
Within current range of ceilings where lenders can operate


Conjecture one

Higher fee ceilings should reduce demand

But if there is excess demand at the ceiling rate; supply
determines equilibrium quantity

Higher fee ceilings increase the quantity sold
Conjecture two

Higher fee ceilings reduce volume of loans needed to cover fix
costs and be profitable

Increases the number of stores a market can support

Relatively little affect on quantity sold
12
Our Strategy

The 2009 Unbanked/Underbanked Survey: A supplement to
the Jan 2009 CPS sponsored by the FDIC. Large nationally
representative sample allows state-level estimates of usage.

Included questions about :
Use of payday loans and pawnshop loans
Reasons for using a product rather than going to a bank
Reasons why the credit was needed

Matched with the rich CPS demographic data
13
Our Strategy

We use CPS data to estimate loan demand associated with
household demographic characteristics using only withinmarket variation.

Use these estimates to construct geographic estimates of
usage adjusted for the demographic component of demand.

Examine how adjusted-usage estimates are related to state
fee ceilings
14
Payday Loan and Pawnshop
Demographic Demand

60 percent of borrower say they could not borrow elsewhere.

Major use of funds: basic living expenses; lost income and
specific bill or expense also important reasons

Multivariate results: Demographics of Use
 Higher payday or pawnshop use: renter; has children
Unemployed; moderate age (25-45); divorced, separated or
widowed;
 Lower use of both product: college degree; foreign born
 Higher payday use: disabled; moderate income; moderate
education; single female head of household; Black; Native
American; (Lower use among retired)
 Higher pawnshop use: unbanked; lower income; single;
smaller renter effect; larger Native American effect; smaller
Black effect; larger UE effect; less of an education effect; no
FHOH effect;
15
Table 5: Multivariate Analysis of Household Demographics and AFS Credit Use
Independent Variable
A: Use payday loan 1
Coefficient
Std. Error
B: Used Pawnshop 2
Coefficient Std. Error
0.0049
0.0469
***
0.0034 <.0001
0.0486
0.0030 ***
<.0001
0.0091
***
0.0021 <.0001
0.0586
0.0040 ***
<.0001
0.0084
0.0028
***
Native American
Parentage (no chlidren)
0.0253
0.0104
0.0262
0.0073
***
Children 18+
0.0204
0.0052 ***
<.0001
0.0173
***
0.0036 <.0001
Children <18
0.0320
0.0055 ***
<.0001
0.0174
***
0.0039 <.0001
0.0192
0.0050
***
0.0434
***
0.0035 <.0001
-0.0105
0.0045
*
-0.0041
0.0031
0.0140
0.0055
*
-0.0013
0.0039
HH income$15-30K
0.0102
0.0044
*
-0.0122
***
0.0031 <.0001
HH income 30-50
0.0138
0.0045
**
-0.0175
***
0.0031 <.0001
HH income $50-75K
0.0027
0.0049
-0.0263
***
0.0034 <.0001
-0.0075
0.0050
-0.0289
***
0.0035 <.0001
Unbanked
Renter
Race (NHW)
Black
-0.0051
*
Labor Force Status (employed)
Unemployed
Retired
Disabled
Household Income (LT$15K)
HH income>$75K
Householder Age (LT 25)
Age 25-34
Age 35-44
0.0260
0.0056 ***
<.0001
0.0107
0.0040
**
***
0.0113
0.0041
**
*
0.0227
0.0058 <.0001
Widowed
0.0132
0.0063
*
0.0097
0.0044
Divorced/separated
0.0199
0.0053
***
0.0165
***
0.0037 <.0001
Single
0.0039
0.0054
0.0085
0.0038
0.0070
0.0040
Marital Status (married)
*
Education (no HS diploma)
High school diploma
Some college/AA
0.0151
-0.0014
0.0028
0.0042
***
-0.0022
0.0029
-0.0109
0.0035
College degree
-0.0117
0.0049
*
Post graduate
-0.0116
0.0049
*
-0.0051
0.0034
0.0057
***
-0.0044
0.0040
***
-0.0161
0.0030
Female head of household
16
Foreign-born
0.0213
-0.0273
0.0043 <.0001
**
***
<.0001
How Fee Limits Affect Use
State Fee Limits per $100
State Group
Not Permitted
Payday Fee
Range
NA
Pawn Fee Range
Low
$10-$12
$1-$9
Medium
$15-$16
$10-$19
High
$17-$20
$20-$25
No Ceiling/Very
High > $20 or None
17
None
Second Stage: Fee Ceilings and
Loan Use Net of Demographics

Dependent variables: Usage adjusted for demographics
(actual usage less usage predicted by demographics) in
a given geographic area (Equivalent to “fixed effects”
from 1st stage)

Sample includes 365 geographic areas identified in the
CPS data in states where payday stores can operate

Explanatory variables include:
Fee ceiling categories
Categorical variables for broad region; rural
dummy; median income of market where the area
is located
Relative fee ceilings on “substitute” product
18
Table 6: Multivariate Analysis of Fee Ceilings and Adjusted AFS Credit Usage
A: Incidence of Payday borrowing adjusted
Coefficient
Intercept
Payday fee ceiling group 3
Std. Error
0.0050
Group 1 (lowest ceilings)
-0.0271
Group 3
-0.0103
Group 4
0.0054
Group 5 (no ceilings)
-0.0063
Pawn shop see ceiling group 4
Group 2 (next to lowest ceilings)
0.0067
0.0060 ***
0.0046 *
0.0084
0.0071
Group 3
Group 4 (no ceilings)
Relative pawn shop fee ceiling
Lower
Higher
Region: North
-0.0013
Region: West
0.0112
Rural
Market income group 2
Market income group 3
Market income group 4 (highest)
Dependent Variable Mean
Number of geographic areas
r squared
2
-0.0010
0.0003
-0.0003
-0.0125
0.0055
0.0047 *
0.0055
0.0061
0.0068
0.0076
1
Coefficient Std. Error
0.0042
-0.0286
-0.0094
0.0051
-0.0065
0.0069
B: Incidence of Pawnshop borrowing adjusted 1
Coefficient Std. Error
CoefficientStd. Error
-0.0171
0.0128
-0.0061
0.0042
-0.0092
0.0050
-0.0034
0.0039
0.0238
0.0137
0.0127
0.0138
0.0129
0.0048
0.0032
0.0042
0.0074
-0.0006
0.0043
0.0032
-0.0099
0.0035
**
0.0068
0.0025
**
-0.0063
-0.0008
-0.0031
-0.0047
0.0030
0.0033
0.0037
0.0040
*
0.0066 ***
0.0047 *
0.0084
0.0071
-0.0041
-0.0073
0.0043
0.0083
0.0222
0.0018
0.0121
0.0067
0.0002
0.0058
-0.0129
0.0041
**
*
0.0135
0.0052
0.0069
0.0028
-0.0001
0.0016
0.0015
-0.0106
0.0057
0.0063
0.0070
0.0078
-0.0047
-0.0005
-0.0027
-0.0030
0.0035
0.0038
0.0044
0.0050
0
0
365
0.0765
365
0.0799
0
365
0.1416
***
0
516
0.1310
Nonlinear effect of payday fee ceilings on usage adjusted for local
demographics; lower in the lowest payday fee-ceiling group—but also lower
in the high fee-ceiling group ($17-20 per $100)
Pawn shop use is highest in the high fee-ceiling group ($20-25 per $80)
19
Effects of Fee Ceiling on Specific
Demographic Groups
Table 9: Pawnshop Residuals by State Fee Ceilings
<$10
Group
Variables
Total Households
$10-$19
Group
$20-$25
Group
No Ceiling
Group
-0.012
-0.001
0.004
-0.003
Black
-0.025
0.003
0.002
-0.014
Hispanic
-0.008
-0.005
0.010
-0.010
Asian
-0.003
0.003
0.000
-0.002
Native American
-0.048
-0.001
0.020
-0.017
Other race
-0.011
0.005
-0.008
-0.024
NonHispanic White
-0.010
-0.002
0.003
-0.001
HH income<$15K
-0.033
0.003
0.009
-0.015
HH income$15-30K
-0.015
-0.002
0.003
0.005
HH income 30-50
-0.014
-0.005
0.008
-0.003
HH income $50-75K
-0.005
-0.001
0.005
-0.005
HH income>$75K
-0.004
0.000
0.001
-0.003
HH income missing
-0.009
-0.005
-0.002
0.000
No high school diploma
-0.021
0.002
0.005
-0.005
High school diploma
-0.016
-0.002
0.004
-0.003
Some college/AA
-0.012
-0.004
0.005
-0.003
College degree
-0.005
-0.002
0.005
-0.001
Post graduate
-0.004
0.002
-0.003
-0.005
-0.029
0.004
0.001
-0.016
Race
Household Income
Education
20
Female head of household
Fee Ceilings and Stores per Capita

Only have store count data at the state level

Use estimates from demographic regressions to
summarize mean use (demand) at the state level

Find state fee ceilings (and demographics) are strong
predictors of the number of payday stores and pawn
shops per capita.
21
State fee ceilings (and demographics) are strong predictors
of the number of payday and pawn stores.
Table 7: Multivariate Analysis of AFS Credit Fee Ceilings and Stores per Capita
Panel A: Number of payday stores per-capita
Coefficient Std. Error
Intercept
-2.4352
0.6319
***
-0.4631
0.2071
*
Payday fee ceiling group 2
Group 1 (lowest ceilings)
Group 3
Group 4
0.3321
0.9400
Group 5 (no ceilings)
0.1527 *
0.3251 **
0.5290
0.2779
Estimated demand from Demographics
74.0100
14.1603
Dependent Variable Mean
n
r squared
1.0331
37.0000
0.6599
***
Panel B: Number of pawnshop stores per-capita Payday States
Coefficient Std. Error
Coefficient Std. Error
-0.7320
0.2794
*
Group 2 (next to lowest ceilings)
0.2674
0.1202
*
0.2438
0.0822
**
Group 3
0.4473
0.1069
***
0.4238
0.0769
***
0.3429
0.1458
*
0.3425
0.0957
***
40.2732
11.6707
43.1111
9.0218
***
Intercept
Pawn shop see ceiling group
Estimated demand from Demographics
Dependent Variable Mean
n (states)
r squared
1
-0.7754
0.1957
***
3
Group 4 (no ceilings)
22
All States
**
0.4373
0.3993
37
0.5516
51
0.6450
*, *, *** : Significant at the 5%, 1%, and .1% levels
1 First column regressions only use geographic areas in states where payday lending is permitted.
The second uses all areas.
2 Base group is states with $15-$16 fee caps
3 Base group is states with the lowest fee caps
Payday Loans and Pawn shop
“Substitutability”
Table 10: Interactions between Payday and Pawn Shop Fee Ceilings
Average Incidence of product usage by group adjusted for demographics
Payday loans
Payday loan Fee
Pawn Shop Loan Fee Ceiling
Ceiling
Lower
Same
Higher
No Payday
1.20
1.14
$10-$12
1.62
3.37
2.40
$15-$16
5.22
4.59
$17-$20
4.31
4.66
4.39
High or No ceiling
4.15
5.90
Pawnshop Use
Payday loan Fee
Pawn Shop Loan Fee Ceiling
Ceiling
Lower
Same
Higher
No Payday
1.11
1.92
$10-$12
0.85
3.65
2.18
$15-$16
1.65
1.89
$17-$20
1.97
2.48
2.39
High or No ceiling
1.86
1.77
23
Findings
 Demographics do explain a lot of the cross-market
variation in usage.
 Adjusted Payday Use appears to be relatively
uncorrelated with state fee ceilings
 Lower in the lowest fee ceiling group but also in the
medium fee ceiling group ($17-20 per $100
borrowed); even though lower ceilings appear to
reduce the number of stores
 Adjusted pawnshop is somewhat more sensitive to fee
ceilings; highest use in higher fee group ($20-25 per
$100 borrowed) and stores per capita are the highest
for states in this fee group
24
Issues
 Use of small high cost loans: repeated use to make ends
meet
 Other AFS products: Auto-title lending; refund
Anticipation loans; RTO
 Direct deposit advance
 What is the best we can do?




Product limitations
Disclosure, framing the costs
Enforcement
Subsidize more affordable product
25