The Effects of Restricting Payday Lending

Sep 20, 2011

Payday loan shops provide small, short-term loans. A typical loan ranges in size from $100 to $500, and must be repaid within two weeks. The industry contends that such loans help people pay for unforeseen expenses.

But many people believe that such loans are harmful because of the amount of interest charged. In the state of Missouri, the average APR on payday loans is above 400%.

One vocal opponent in Kansas City is the faith-based group Communities Creating Opportunity (CCO), which is part of the PICO National Network. CCO organizes grassroots efforts and is also an advocate for restrictions on payday lending at the state level.

In some states, the opposition to payday lending has led to bans and other restrictions. Those restrictions, however, might be counterproductive, according to a research paper published earlier this year. In that paper, economist Kelly Edmiston finds that restricting access to payday lending could potentially harm consumers by (1) reducing their access to credit and (2) impairing their overall credit standing.

While opponents of payday lending are still advocating for state laws to restrict such lending, another approach some are taking is to provide alternative loan products that are less expensive than traditional payday loans. CCO is taking this approach in addition to its other activities.