we present analysis of individual-level data from one large payday lender that begins to explain how astronomical loan interest rates can coexist with more pedestrian firm-level return on equity.
The individual data reveal that loans are small, yielding interest payments of only $49 on average; loss ratios of about 5% per loan immediately consume over 1=4 of interest income; and net financial returns interest payments less loan defaults amount in expectation over all of the marginal borrower’s loans to only about $100.
These data are consistent with the interpretation that payday lenders in a competitive market face per-loan and per-store fixed costs that are large relative to the interest earnings on their small loans. Third, we contextualize our findings in relation to a small but excellent and rapidly growing literature on the supply side of the payday loan industry.
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