Scale Economies at Payday Loan Stores

Abstract

Payday lenders advance small, short-term consumer loans through convenient storefront shops with limited underwriting. However, their fees convert to very high annualized rates of interest (APR’s > 390%). Using proprietary, store-level data, we find that a store’s age importantly affects its profitability. Younger stores have fewer customers, make fewer loans, and experience higher losses per loan than more mature stores. Regardless of age, stores making a larger number of loans per customer enjoy lower default losses and lower operating costs per loan. Although these conclusions cannot necessarily be generalized to the entire payday industry, they do seem to apply to the sort of large, monoline lenders that control more than a fourth of the industry’s storefronts.

Keywords: payday lending, price ceilings, small dollar loans

JEL Classification: G21, D14, D4