An Economic Perspective on Subprime Lending

By: Michael H. Anderson


This article aims to provide a concise economic overview of several interesting subprime financing mechanisms, which are becoming increasingly common on the U.S. financial landscape. In particular, rent-to-own, payday lending, pawn broking, and (vehicle) title loans are considered. Generally speaking, a common thread with these loans is their relatively small size and short duration as well as the absence of a credit check or any of the traditional processes for determining credit-worthiness. Due to the ready availability of these loans, they appeal to low-income consumers, including the “working poor,” and to those who have suffered financial setbacks. Because the natural clientele for such mechanisms have few or no alternatives, concern over the possibility of exploiting such consumers has lead to a continuing public policy debate over how best to help these individuals, and whether, and to what extent, regulation should play a role. By providing economic background on these subprime vehicles, this article attempts to make a contribution to this on-going debate.

Cite as: Michael H. Anderson, An Economic Perspective on Subprime Lending, 89 Chi.-Kent L. Rev. 53 (2014).