Restrictions on small and short term loans will only hurt Minnesotans

Payday or short-term loans have a bad reputation — and for an understandable reason. Interest on payday loans tends to be high. Additionally, it is usually low-income, credit-crunched individuals that frequent payday loan establishments.

But this does not negate the fact that payday loans serve an essential purpose. As I have written before,

Payday loans generally exist because they are necessary. To some people, payday loans are the only fast and convenient source of cash. As explained by the St. Louis Fed,

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.


contrary to helping individuals, restrictions on payday loans actually end up hurting low-income individuals by denying them cash when they need it the most.
In fact, an NBER working paper found that 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. For those borrowers, policies that limit choice and access to such loans such as caps on loan sizes and loan bans actually reduce consumer welfare –– that is the benefit/satisfaction that borrowers get from accessing such loans.
Additionally, a 2011 research paper also found that “restrictions could deny some consumers access to credit, limit their ability to maintain formal credit standing, or force them to seek more costly credit alternatives.”

The Minnesota Legislature has introduced a bill: SF 1635 and its House companion HF 290. If passed, this bill will limit the annual interest rate on short-term loans to 36 percent, probably in an attempt to protect customers from being exploited with high-interest rates.

But if the evidence is any indication, restrictions on short-term loans do not help consumers. They do the opposite. Such restrictions on interest rates will likely make it less profitable for lenders to provide such small loans which will likely make it hard for Minnesotans to access them.