Payday Lending and the Demand for Alternative Financial Services Payday Lending and the Demand for Alternative Financial Services

By Andrew Weaver and Roman V. Galperin

In this Issue Brief we discuss research that explores the impact of banning or strictly regulating high-cost consumer financial services like payday loans. Industry supporters maintain that such bans deprive consumers of vital access to cash, while opponents contend that these services trap individuals in a cycle of debt and thus generate more harm than good. We specifically measure the effect of state bans on payday lending on the demand for an alternative source of high-cost consumer credit: tax refund anticipation loans. We employ a unique matched zip-code strategy to construct an appropriate control group. Our results provide support for the view that "cycle-of-debt" borrowers dominate the payday lending market. These results imply that restrictions on high-cost consumer financial services may improve consumer welfare.