Are Payday Loans Really a Menace?

The payday loan—which grants the borrower an advance on his salary, in exchange for interest payments—is an often villainized financial service. As Slate's Ray Fisman explains, many object to the sky-high interest rates attached to these loans and argue that lenders prey on ill-informed customers. But the lenders say that they help borrowers in need. Fisman parses the issue:

Payday lenders themselves argue that they're being victimized for providing a critical social service, helping the hard-up put food on the table and cover the rent until their next paychecks. Charging what seem like usurious interest rates, they claim, is the only way to cover the cost of making $100 loans to high-risk borrowers.

If payday lenders really do provide a much-needed financial resource, why deprive Ohioans and American servicemen of this service? A recent study by University of Chicago economists Marianne Bertrand and Adaire Morse suggests there might be a middle ground, by allowing payday lenders to continue making loans but requiring them to better explain their long-term financial cost. In a nationwide experiment, Bertrand and Morse found that providing a clear and tangible description of a loan's cost reduced the number of applicants choosing to take payday loans by as much as 10 percent. Better information, it turns out, may dissuade borrowers vulnerable to the lure of quick cash while maintaining the option of immediate financing for those truly in need.

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