Industry Research

"Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?"

By Aaron Huckstep, Senior Staff Attorney at Moss Adams, LLP
2007

Summary

“Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits,?” an article published in the Fordham Journal of Corporate & Financial Law, examines whether the relatively high cost of obtaining a small dollar, short-term loan results in enormous profit to payday lenders.  The report concludes that payday advance fees are consistent with high operating costs associated with running a payday advance business, a position that has been articulated by the industry for many years.  The author also observes that when compared to the profits of other financial institutions, payday lenders may fall short in terms of profitability.  The author cautions state legislators to “refrain from acting in haste” when considering payday lending legislation and suggests that legislators “would be wise to carefully consider and study the industry’s explanation of its operating costs and profitability.”

Report findings

“The study shows that, despite the common belief, payday lending firms do not always make extraordinary profits.  In fact, when compared to many other well-known lending institutions, payday lenders may fall far short in terms of profitability.”

“Unfortunately, there are not many viable alternatives to payday lending.”

“The cost of providing convenience is high: to compete in a local area, payday lenders must operate a high density of stores, and keep those stores open beyond normal business hours.”

“This study finds that the industry’s proffered justifications for high service fees, and by extension high APRs, may be justified by both high store expenses and high loan losses.”

“These figures indicate that payday lenders are not overly profitable organizations.  Contrary to conventional wisdom, these firms fall short of profits for mainstream commercial lenders.” 

“If companies should be limited to a certain profitability measure, citizens would be better off fighting Starbucks than their local payday lender.” 

“Calls for regulating the industry are based partially on the assumption that payday lenders generate enormous profits from the high cost of borrowing.  High profits for payday lenders, however, may be more myth than reality.” 

Click here for the report (PDF).