American Experiment warned that this would happen

Arguing that payday loans are exploitative, the Minnesota Legislature passed a law restricting interest rates charged on such loans. But as it turns out, that has had some negative consequences. The Star Tribune reported that due to the law, Minnesota’s top lender has stopped offering payday loans. And in other states that have had similar laws, the result has also been the same.

What a shocker! Except we saw it coming. In fact, when this bill was heard in the legislature, American Experiment provided written testimony explaining that the bill would restrict access to payday loans for those who most need them, hurting them in turn.

Here is that testimony:

Dear Members of the Commerce and Consumer Protection Committee:

My name is Martha Njolomole, and I am an Economist at the Center of the American Experiment. I thank you for the opportunity to provide comments on bill SF 1635. This bill, if passed, will likely reduce the incentive for financial lenders to offer short-term loans which might hurt poor Minnesotans, who disproportionately rely on these kinds of loans.

Restrictions on short-term loans only hurt consumers

Short-term loans generally exist because they are necessary. To some people, short-term loans are the only fast and convenient source of cash. As explained by the Federal Reserve Bank of St. Louis,

“Payday loans fulfill a need for many people, especially consumers who don’t have access to traditional loans or who have no or low credit scores.18 In 2017, estimates show that among U.S. households, 6.5 percent (8.4 million) were unbanked; and 18.7 percent (24.2 million) were underbanked—that is, they had a bank account but used alternative financial services, such as payday loans.19 With bad credit (no or low credit scores), these consumers are often unable to get traditional loans, so they turn to alternative lenders.”

Thereby laws that restrict short term loans end up hurting borrowers more than they help. In fact, a 2011 research paper found that restrictions on short-term loans “deny some consumers access to credit, limit their ability to maintain formal credit standing, or force them to seek more costly credit alternatives.”[1]

And contrary to popular opinion, people that use short-term loans are not unaware or easily exploited. They are rational individuals who make thoughtful decisions regarding their financial situation. According to a working paper published by the National Bureau of Economic Research (NBER), for example, long-term borrowers can accurately predict when they would need to borrow, which helps them pay off loans early thereby reducing the total cost of borrowing. [2]

By restricting the amount of interest that financial lenders can charge on short-term loans, Bill SF 1635 will discourage financial lenders from providing short-term loans. This will only hurt individuals that rely on such loans.


Martha Njolomole


Center of the American Experiment

[1] Edmiston, Kelly D.. “Could restrictions on payday lending hurt consumers?” Econometric Reviews 96 (2011): 63.

[2] Allcott, H., Kim, J., Taubinsky, D., & Zinman, J. (2021). Are high-interest loans predatory? theory and evidence from payday lending. 

As John Phelan explained price ceilings generally reduce the price of goods and services. We have seen this with rent control and minimum wage. What’s happening with payday loans is only just another illustration of basic economics at work.

And much like previously with rent control and minimum wage, we warned against it.