MIDLAND, MICH. — The Mackinac Center for Public Policy today released a study titled, “Small-Dollar Lending Innovation and The True Cost of Credit,” authored by prominent Michigan economist Dr. Gary Wolfram, director of economics at Hillsdale College. The report helps state and federal legislators understand the importance of access to credit and the unintended consequences of policies that limit these types of financial products.

According to Dr. Wolfram, an estimated 80% of Americans live paycheck-to-paycheck, and many of these Americans do not have a convenient or feasible way to access credit when they need it. For many, small-dollar payday and installment loans are their only option. Critics of these products claim they are too expensive or even “predatory.” However, basing public policy on these simplistic critiques would create more problems than it solves.

In the report, Dr. Wolfram shows how paying the costs of small-dollar loans, although relatively more expensive than conventional financial products like mortgages and car loans, can make sense for millions of Americans. For consumers with bad credit or who are “unbanked” or “underbanked,” this might be their only method of accessing credit when they have to deal with unexpected expenses.

“While it is tempting to decry small-dollar loans as too costly or even unfair, the facts show that they are much more affordable than other options,” said Dr. Wolfram, who is a member of the Mackinac Center’s Board of Scholars. “I hope this report provides policymakers with the data and facts needed to implement effective, sensible policy.”

Dr. Wolfram also explains how many of the attempts to regulate small-dollar credit products miss the mark. The most prominent mistake is that regulators often evaluate them using metrics designed for conventional financial loans. Policymakers should instead assess what the value of these products are to the consumers who use them. Most often, these small-dollar loans serve a vital purpose for millions of Americans.

The full report can be downloaded at https://www.mackinac.org/archives/2019/s2019-07.pdf.