Politics and Poverty: State-Level Determinants of Payday Loan Interest Rates

Payday loans refer to small-dollar, short-term, high-interest extensions of cash funds. To obtain a payday loan, low- and moderate-income consumers write a post-dated check to the payday lender in the amount of the principal and the interest charges—usually $20 for every $100 of the payday loan principal. The payday lender retains the post-dated check until the consumer’s payday and then cashes it or charges fees for insufficient funds. The interest charges for payday loans can amount to annual percentage rates (APRs) when one annualizes the charges for a two-week payday loan. Consumer advocates view lower payday loan APRs as consumer-friendly and higher APRs as a means to economically exploit financially-fragile families. States differ in the APRs they allow payday lenders to charge for loans. This study examined the extent to which political ideology predicted the American states’ adoption of maximum payday loan APRs.

The internal determinants model of policy adoption posits that governments adopt policies based on the socioeconomic and political attributes of the state. Thus, it was hypothesized that state governments’ liberal political ideology would be negatively related to the APRs, controlling for three macroeconomic control variables.

This study was relational and utilized a multivariate ordinary least squares regression analysis with White’s robust standard errors. Employing purposive sampling methods, this cross-sectional study contained data for 45 of the 50 American states, excluding the five states that did not have maximum payday loan APRs. The dependent variable, state-allowed payday loan APR, was operationalized as the annualization of two-week payday loan charges. The independent variable of interest was operationalized as state governments’ political ideology, a score ranging from 0 representing conservative state political ideology to 100 representing liberal state political ideology. The control variables included state per-capita gross domestic products, state per-capita total amounts of bank deposits (in millions of dollars), and the percent of people in a state’s population who received monthly TANF benefits.

The results showed that state governments’ political ideology scores were negatively related to the APRs (b = -6.086017, White’s Robust S.E. = 3.229744, p = 0.0335), holding the other variables constant. This means that a one-unit increase in state governments’ political ideology scores was associated with a 6.086% decrease in the APRs that the states allow payday lenders to charge. Because the state governments’ liberal political ideology scores were coded from 0, denoting conservative state political ideology, to 100, denoting liberal state political ideology, this means that the distance between the most conservative states, denoted as 0, and the most liberal states, denoted as 100, resulted in a 608.6% decrease in the APRs that states allow payday lenders to charge.

This study supports the internal determinants model and suggests that increases in the liberal political ideology of state government officials were associated with decreases in the APRs that states allow payday lenders to charge for payday loan credit. Social workers can use this information to pinpoint key groups of legislators that may need more extensive lobbying when advocating for lower APRs for financially vulnerable consumers.