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Payday Lenders: Heroes Or Villains?
By Adair Morse, Graduate School of Business, University of Chicago
January 2007

Summary

According to a study by Adair Morse, titled “Payday Lenders: Heroes or Villains?”, access to payday advances assist communities in responding to natural disasters. In assessing the impact of payday lenders on disaster-struck communities, Morse examines numerous California communities which were hit with a natural disaster between 1996 and 2005. After examining four measures of community welfare: death rates, drug and alcohol treatment rates, foreclosure rates, and birth rates, Morse discovers that communities struck by natural disasters are more resilient and their community welfare improves as result of the availability of payday advances (e.g., individuals in these communities are less likely to face foreclosure). The study reveals that payday lenders provide much needed capital to individuals in communities affected by natural disasters. Additionally, Morse concludes that banks are incapable of serving people in distress in a positive manner the way that payday lenders can.

Report findings:

  • “Payday lending decreases the number of foreclosures that result following a natural disaster.”
  • “In communities with payday lenders, foreclosures fall 62% in both areas hit by disasters and those not hit by disasters. Thus, the effect of the natural disaster on foreclosures is completely mitigated in payday communities.”
  • “Drug and alcohol treatments fall even more for communities with payday lenders.”
  • “I find that the existence of payday lending increases welfare for all four outcome measures considered: foreclosures, death, drug and alcohol abuse, and births.”
  • “I also find that in the majority of specifications, banks cannot serve the welfare-enhancing role for individuals in distress that payday lenders serve. As in the market for corporate distress finance, mainstream financial institutions do not serve as a substitute financial instruments for distressed individuals.”
  • “If the existence of payday lending is valuable for those facing personal disaster in a way that other financial institutions cannot provide, then regulators should strive to make access to finance easier and more affordable, not ban it.”
  • “If payday lending is welfare improving for at least some portion of the population, a move to ban payday lending is ill advised. Instead, alternative methods should be pursued to assist perpetual borrowers to stay out of debt traps.”



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