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Payday loans can have a annual interest rate of 400%, but people who take them don’t look it it that way when they borrow $100 and pay back $115 in two weeks. Many fall into the trap of taking a second, third, or more loans to cover the shortfalls caused by the previous loans. University of Chicago economists Marianne Bertrand and Adaire Morse ran an experiment in which they explained the terms of payday loans in detail, and gave statistics on how the average borrower must continue getting loans.
In a nationwide experiment, Bertrand and Morse found that providing a clear and tangible description of a loan’s cost reduced the number of applicants choosing to take payday loans by as much as 10 percent. Better information, it turns out, may dissuade borrowers vulnerable to the lure of quick cash while maintaining the option of immediate financing for those truly in need.
Among the other 90%, some won’t change their behavior no matter what, but many have no other credit options available. Link
