A study published by the Federal Reserve Bank of New York, as authored by Donald P. Morgan, is beginning to shine light on the fact that the payday loan industry has been unfairly dismissed as “predatory”. In his study, Mr. Morgan provides exhaustive data on the effect of the payday loan industry on American households who utilize them, while demonstrating how such households actually benefit. Mr. Morgan begins his study by providing a definition of “predatory lending”: “…a welfare reducing provision of credit.” With this, Mr. Morgan is able to examine whether payday lending meets this definition.

Mr. Morgan makes two main points. The first is that if payday lending is “predatory” then their profit level should cause more companies to appear, thus reducing the cost through market competition. In other words, payday loan costs cannot be as exorbitant as critics’ claim, as market forces would not allow for such “abnormal” profits. Mr. Morgan’s second point challenges the notion that payday lenders offer “unaffordable credit”. If payday lenders loaned primarily to those who could not repay, the industry would go out of business due to lack of funds.

The study goes on to show that political reformers are shortsighted in their pursuit of regulatory action. Mr. Morgan states, “Reformers often advocate usury limits to lower payday loan fees but our evidence suggests that competition among payday lenders (and pawnshops) works to lower payday loan prices.” Essentially, payday loans cannot have a “predatory” rate, as the marketplace sets the costs at what the market will bear.

Mr. Morgan suggests that payday loans actually raise the welfare of the households that utilize them. For example, Mr. Morgan states, “If payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it.” He continues on to indicate that household welfare is increased with the availability of credit stating, “Monopoly lenders lower household welfare, but even with a monopolist, households cannot be worse off than without credit.” By “monopolist lenders” Mr. Morgan is referring markets that have only one place to turn for credit.

Part of what makes payday loans welfare-improving is the technology that allows for a low cost loan process. In Mr. Morgan’s words, “The payday lending technology may have lowered those fixed costs (per small loan), thus increasing the supply of credit to low income households demanding small loans. That version of the genesis of payday lending suggests the innovation was welfare improving, not predatory (emphasis Morgan’s).” Through his detailed tables, data and equations, Mr. Morgan makes a serious argument against the unwarranted vilification of the payday loan industry as a “predatory lender”.

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