Abstract

Would you pay $1000 in fees to borrow $100 for a period of twenty weeks? Is it possible that such a loan is even legal? Welcome to the world of payday lending—one of the fastest growing segments of the consumer-credit industry. This Article describes the practices of payday loan companies and then discusses some states' failed attempts to institute regulation. These legislative efforts frequently fail because crafty lenders quickly adapt to new legislation by finding loopholes that undermine any consumer protection provided by the new regulatory laws. This Article also reports on an empirical study of borrower conduct and understanding of payday lending terms. This study is one of the first to gather information about these loans directly from customers at the point of sale. These study data uncover critical facts, including a deep misunderstanding by most borrowers of the true cost of the loans. These data also reveal an apparent inability of many consumers to "do the math" necessary to conceptualize the structure of the loans. This lack of understanding leaves many consumers unable to make important comparisons with other forms of credit which may have been available to them. This study reveals the need for effective regulation through legislation, and suggests that a federal usury cap may be the only real solution.

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