The emerging payday loan industry is one of the fastest growing segments in the broader consumer financial services market. One estimate suggests that the number of payday loan offices nationwide increased from roughly 300 in 1992 to nearly 10,000 by 2001. At the same time, and despite (or perhaps because of) its infancy, payday lending is becoming one of the most heavily regulated segments of the financial services industry.

Thirty-nine states permit regulated payday loan operations, limiting fees that can be charged, setting maximum loan amounts per borrower, limiting the term of loans, and setting limits on the number of times a customer may access multiple or repeated payday loans in a given period. Eleven states explicitly outlaw payday loan operations altogether. Currently, payday loan operations are regulated on a state-by-state basis in compliance with broad federal guidelines set by, among others, the Truth in Lending Act and the Federal Deposit Insurance Act. However, current trends suggest that federal regulation targeting the payday lending industry could be forthcoming, and state legislatures continue to debate proposals for further regulating or even banning the practice altogether.

Given this tenuous environment, it is important for elected officials to have a better understanding of the economics of payday lending, the markets in which these firms operate, and the consumers they serve. The general consensus appears to be that payday lending is a practice that offers few benefits and may do harm to unwitting borrowers, thus necessitating government intervention and regulation. This paper hopes to counter that view by providing an analysis of the payday lending industry, its history and market characteristics, the profile of its “typical” borrower, numerous criticisms of the industry and, perhaps most importantly, the unintended consequences of policy interventions into this industry that are often overlooked. The message to state officials is: beware of the law of unintended consequences; well-intended policies may end up doing more harm than good for the people you hope to assist.