The authors explain that payday loans are short-term, small loans with high annual percentage rates (APRs) and are often rolled over.
The controversy stems from the perception that payday lenders target minority neighborhoods. Previous studies have shown that payday lenders tend to locate in areas with more black and Hispanic residents.
However, these studies cannot determine which households are using payday
credit or control for individual financial circumstances.
The authors use household-level data from the Federal Reserve's Survey of Consumer Finances to shed light on the issue.
They find that, unconditionally, black and Hispanic households are overrepresented among payday credit users. However, when controlling for demographic and financial variables, such as age, gender, education, income, and credit history, the racial disparities disappear.
The authors
conclude that once these factors are considered, race is not significant in determining the likelihood of using payday credit.
The key takeaway from the analysis is that while minorities may initially appear to be more likely to use payday credit, this difference can be explained by their lower financial status
and credit problems rather than race itself. Controlling for financial characteristics eliminates racial disparities, suggesting that targeting minorities by payday lenders may reflect their financial vulnerabilities rather than explicit targeting based on race.
