Determinants of Short-term Lender Location and Interest Rates

This study tests the degree to which payday and title lenders differentiate their store location and interest rates based on the socioeconomic characteristics of the areas in which they operate. We use store-level lender data, geographically matched IRS income data, and Census Bureau demographic data to answer these questions. In the case of lender location, we find that payday and title lenders tend to locate in areas with lower median age, a larger population of not married households, more restaurants, and more pawn shops. We also find a nonlinear relationship between lender location and individual incomes in the surrounding area. Regarding lender interest rates, we find that competition among lenders reduces average interest rates and that riskiness of borrowers, as measured by defaults, increases average interest rates. We also find that payday and title lenders have higher interest rates in areas with lower educational attainment, smaller proportions of Black residents, and fewer married households. This evidence seems to contradict the argument that payday and title lenders prey on minorities.