Since its inception in the 1990s, the payday lending industry has grown at an astonishing pace. Currently, there are about 22,000 payday lending locations—more than two for every Starbucks—that originate an estimated $27 billion in annual loan volume.
Christians and others worried about the poor tend to be very uncomfortable with this industry. While there may be forms of payday lending that are ethical, the concern is that most such lending is predatory, and that the industry takes advantage of the poor and others in financial distress.
So what makes a payday loan a predatory loan? The obvious answer would seem to be “high interest rates.” But interest rates are often tied to credit risk, and so charging high interest rates is not always wrong. Another answer may be that the loans appear to be targeted toward minorities. But research shows that the industry appeals to those with financial problems regardless of race or ethnicity.
What then tips a loan into the predatory column? At a blog hosted by the New York Federal Reserve, Robert DeYoung, Ronald J. Mann, Donald P. Morgan, and Michael R. Strain attempt to answer that question: