David K. Musto, Philip Bond and Bilge Yilmaz, finance professors at Wharton, have authored a new paper, “Predatory Lending in a Rational World,” asking the questions, “What is predatory lending? And what are the conditions that make it flourish?”
They found three market conditions associated with predatory lending:
1. There is little competition among lenders
2. Property owners are sitting on lots of equity
3. Borrowers are poorly informed about risks.
Payday lending does not meet even one of the three elements. With payday lending, there is competition (unless prevented by state regulations), the collateral on a payday loan is a personal check and all fees are displayed in large type on poster-size displays in all CFSA-member stores. Payday loan customers are well-informed of the fees associated with the service.
The authors go on to say ”…But loans that are bad for some borrowers can be appropriate for others. The payday loan might be a sensible choice for a worker in a short-term cash crunch who will pay the debt off quickly and prefers a high interest rate for a short time over the paperwork and delay of a more conventional loan from a bank or credit union. “
