A number of states have passed laws that limit the amount of interest that can be charged on consumer loans. It has had the result of driving payday lenders out of those states.
These laws usually cap interest rates at around 36% APR, which admittedly sounds pretty high, considering prevailing interest rates are less than 4%. But payday lenders can't survive on 36% – their APR is normally closer to 400% .
So when states pass laws limiting interest rates, these storefront money-lenders usually pack up and go somewhere else. Researchers from Australia and New Zealand wondered what else happens when payday lenders leave a state.
Economists Harold Cuffe of Victoria University of Wellington and Christopher Gibbs of The University of New South Wales, looked at Washington state after it enacted regulations that resulted in driving about two-thirds of payday lenders out of the state.
Liquor stores take a hit
Among the effects Cuffe aand Gibbs found was on the state's liquor stores. Sales went down after the regulations took effect.
Not only that, liquor stores located near payday lenders lost the most business. The researchers found that the impact was greater the closer a liquor store was to a former payday lender location,
The takeaway from this, of course, is that many payday loan customers were using their loans to buy alcohol. With the payday lenders out of the picture, these consumers no longer had the chance to buy liquor nearby.
A fair judgment? For insight we turned to the Center for Responsible Lending (CRL), which has devoted extensive attention to payday lenders and their customers.
“The vast majority of payday loans are renewals, which suggests people use them to meet everyday expenses, CRL spokesman Andrew High told ConsumerAffairs. “As for the granular level of detail about what those expenses are, the data doesn't show that. But it's likely to be rent and things like that.”
The research compiled by Cuffe and Gibbs doesn't specifically show that payday loan customers were using the loans to buy liquor, but held open the possibility that buying a fifth of vodka could be an “impulse buy” that someone might make after feeling a little more flush. In other words, restocking the liquor cabinet might in fact, fall under the umbrella of everyday expenses.
A study by the Pew Charitable Trust found that the typical payday loan borrower uses eight loans lasting 18 days each, and thus has a payday loan out for five months of the year. The data from survey respondents clearly indicate that consumers are using the loans to deal with regular, ongoing living expenses.
Alcohol purchases don't show up in the list of expenses. The Pew research shows the first time people took out a payday loan, 69%t used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food.
CLR says the bigger issue is not what payday loan customers are buying but the cycle of debt many consumers unwittingly fall into. The problem, the group says, is that these loans are not the quick fix many think they are.
“According to our research, 76% of all payday loans are taken out within two weeks of a previous payday loan,” High said. “These loans are debt traps by design and people cannot pay them off and cover their normal living expenses, so they return for another loan to cover those normal living expenses when they come due the next month.”
Which may explain why states are regulating them out of business.