Payday Lending: Grounding the Policy Debate Through Economic Analysis by

Few legal businesses can lay claim to a reputation as bad as payday lenders. This study builds on an emerging understanding of payday lending as a business and compares key metrics to traditional lenders. The payday lenders included in this study account for approximately 25% of the stores in the United States. The results seem to disprove the claim that payday loans are much riskier than more mainstream consumer loans. Payday charge-off ratios appear tightly clustered around the averages for consumer loans, and slightly below credit card averages. The majority of costs in issuing a payday loan are derived from store level operations. The argument that high charge-off expense drives the very high fees of payday loans is invalid. It appears that high overall costs do, however, largely justify high fees. The average actual rate charged, however, is nevertheless substantially higher than what the company would need to show an operating profit. At high volumes, where fixed costs are a smaller fraction of revenues, payday lending is a highly profitable business. There is a challenge is reaching this volume, however, due to high store growth and competition. Even with considerably higher leverage, traditional lenders show an ROE that is only similar to that of the payday lenders in normal years. Considering this fact, along with the very high ROA of payday lenders, it would seem that payday lending as a business is more profitable than mainstream consumer lending.