Word and Way has a blogpost up that actually provides perspective on what could happen in Missouri if a prohibitive rate cap is put in place, albeit apologetic. The faith blog cited Kelly Edmiston’s, senior economist for the Federal Reserve Bank of Kansas City, study entitled “Could Restrictions on Payday Lending Hurt Consumers?” And the answer: Yes!

This research provides new empirical evidence on the potential benefits and costs to consumers of restricting payday lending. Edmiston says in his opening remarks:

“The analysis shows that restrictions could deny some consumers access to credit, limit their ability to maintain formal credit standing, or force them to seek more costly credit alternatives. Thus, any policy decisions to restrict payday lending should weigh these potential costs against the potential benefits.”

How, you say?

1. Lack of access to credit: “The most obvious and important cost of restricting payday lending would be the potential loss of credit access for consumers who may not have other sources of credit. Fully 50 percent of respondents to the 2007 payday loan customer survey responded that, when they secured their most recent payday loan, it was their only choice for short-term funds (Elliehausen). This assessment may have been inaccurate in some cases, but lack of knowledge about credit alternatives has the same effect as a true lack of access.”

Another important issue to keep in mind: “Without access to lenders, many financially constrained consumers may turn to family and friends. Payday lenders, however, report that many of their borrowers are reluctant to reveal their financial situation to others, or they have exhausted access to such loans (Caskey 2002). Others may not have family or friends with the financial means to help them.”

2. Credit standing. “When faced with unanticipated changes in income or expenses, a borrower may be forced to miss loan payments or even default on a loan. Unlike traditional lenders, however, payday lenders typically do not report to credit agencies. In the event that finances do not improve over the course of the loan period, defaulting on a payday loan would typically not harm the borrower’s formal credit standing. Thus, from this perspective, payday loans may be less risky than traditional loans.”

3. More costly alternatives. “While a payday loan under normal circumstances is costly to the borrower, its terms could be more favorable than those of other sources of credit. Clearly, if access to a traditional lender such as a bank is available, most would-be payday borrowers would be better off seeking short-term funds there. But few banks make small-dollar loans. Even if they did, few typical payday loan borrowers would have sufficient credit standing to acquire such a loan.”