Payday lending: spatial distribution and neighborhood demographics

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] Payday lending is a topic of much controversy. Issuing short term loans to high risk borrowers, payday lenders often charge interest rates in excess of 400% APR. Many consumer advocates and researchers have argued that payday lenders are predatory, and primarily locate in low income and minority neighborhoods, while payday lenders argue that they provide an essential credit service to a financially limited population. Previous researchers have analyzed the industry based on the location of payday lending branches, assuming that borrowers reside near their stores. Utilizing a unique database of former borrower residential addresses from one company, this research addresses the question of where borrowers actually reside in relation to the stores they borrow from, and what are the socioeconomic and demographic characteristics of the neighborhoods where they reside. The former borrower addressees were mapped and analyzed for patterns in borrower distribution, distance to stores, and demographics in St. Louis, MO; New Orleans, LA; and Los Angeles, CA. The results of the spatial analysis indicated that borrowers tend to live near the stores they borrow from, while the socioeconomic analysis indicated that borrowers often reside in neighborhoods that are less affluent and contain a higher proportion of African Americans than store neighborhoods. Both borrower and store neighborhoods are much less affluent and more racially diverse than the metropolitan areas.