Competition in a consumer loan market: Payday loans and overdraft credit

Brian T. Melzer*, Donald P. Morgan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Scopus citations


Using variation in payday lending restrictions over time and across states, we study competition in the market for small, short-term consumer loans. We find that banks and credit unions reduce overdraft credit limits and prices when payday credit, a possible substitute, is prohibited. These findings suggest that depositories respond to payday loan bans by taking less risk, bouncing checks that they would have otherwise covered. The decline in overdraft prices is surprising when viewed in isolation, but sensible given that depositories incur lower credit losses as they limit overdraft coverage. We find some evidence that credit unions' overdraft activities are more profitable when payday loans are prohibited, consistent with decreased competition. In addition to characterizing the impact of prohibiting payday lending, a common state policy change in recent years, our findings illuminate competition in the small-dollar loan market by highlighting the importance of non-price adjustments to credit offers.

Original languageEnglish (US)
Pages (from-to)25-44
Number of pages20
JournalJournal of Financial Intermediation
Issue number1
StatePublished - Jan 1 2015


  • Consumer credit
  • Household finance
  • Overdraft credit
  • Payday loan
  • Predatory lending
  • Usury

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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