In 2009, consumer advocates in Washington State decided to try a new approach to regulating payday loans. Like reformers in other states, they’d tried to get the legislature to ban high-cost loans outright — but had hit a brick wall. So, instead, they managed to get a law passed that limited borrowers to no more than eight payday loans in one year.
Lenders would still be free to charge annual rates well into the triple digits, but the law would eliminate what critics say is the worst aspect of payday loans: borrowers caught in a cycle of debt by taking out loans over and over.
At least in Washington, most payday loan borrowers didn’t take out eight loans in a year. Data from 2009, the last year before the reform bill went into effect, shows how many people in 2009 took out one to four loans, five to eight loans, and so on. Two-thirds of these borrowers took out eight or fewer loans in 2009.
But the people who take out only a few payday loans do not drive industry profits. That becomes clear when, instead of looking at the number of people, one looks at the number of loans. Then the trend flips: About two-thirds of loans went to borrowers who took out nine or more loans in 2009.
In other words, one-third of payday loan borrowers accounted for two-thirds of payday loans made in Washington State in 2009.