Payday Lending: Do The Costs Justify The Price?
By Mark Flannery, Co-Director of the Center for Financial Research, and Katherine Samolyk, Senior Financial Economist, Federal Deposit Insurance Corporation – Division of Insurance and Research
April 2005

Summary

• “The payday advance product’s structure makes it costly to originate these short-term loans, whose default rates substantially exceed the customary credit losses at mainstream financial institutions.”
• “Moreover, we find that new stores generate negative or low profits for a few years before becoming fully profitable.”
• “We find that fixed operating costs and losses justify a large part of the high APR charged on payday loans.”
• “Wages and occupancy costs (rent, maintenance, utilities and taxes) account for roughly half of the average store’s operating costs – slightly more for a mature store – with local advertising (by the store) accounting for another 5 percent (notably more for new stores).”
• “Not surprisingly, loan losses are a prominent dimension of payday store costs, comprising 27 percent of operating costs for young stores and 24 percent for mature stores.”
• “These operating costs lie in the range of advance fees, suggesting that payday loans may not necessarily yield extraordinary profits.”
• “The industry’s profitability does not depend on the presence of repeat (“trapped”) borrowers.”
• We also find no evidence that payday stores are located in heavily minority-populated areas, as has been suggested by King Et al. (2005), based on data from North Carolina.”