…a study has suggested that merely moving payday lenders out of an area without providing a better alternative hurts consumers. The study was authored by Jonathan Zinman, an economist who recently co-authored a study for the Filene Research Institute on how consumers use debit and credit cards (see story page 18). Zinman is an assistant professor of economics at Dartmouth College.

In his study Zinman studied the effects of an interest rate cap on payday loans put into place in Oregon in July of 2007. The cap essentially limited payday lenders in Oregon to charging $10 per $100 lent and set a minimum loan term of 31 days. The majority of payday lenders in the state left.

Zinman’s study, funded in part by payday lenders through contributions to the Consumer Credit Research Foundation, found that consumers suffered after the departure of payday lenders.

“I find that the cap dramatically reduced access to payday loans in Oregon, and that former payday borowers responded by shifting into incomplete and plausibly inferior substitutes,” Zinman wrote. “Most substitution seems to occur through checking account overdrafts of various types and/or late bills. These alternative sources of liquidity can be quite costly in both direct terms (overdraft and late fees) and indirect terms (eventual loss of checking account, criminal charges, utility shutoff).”

Several of the commenters raised the challenge that nothwithstanding the authors’ conclusions, very high interest rates are still “immoral” and should be banned. But I don’t really follow the logic of the critique–if there are no externalities, and those that borrow are better off as a result, what exactly is the argument for why high interest rate loans are immoral and should be prohibited?