Demand and consumer surplus in the payday-loan market: Evidence from British Columbia

Abstract

This study examines how interest rate caps affect the demand for payday loans, using aggregate data from British Columbia (2012--2019) during which the province's maximum fee was reduced from $23 to $17 and then to \$15 per $100 borrowed. Estimating a linear demand function via OLS, we find that lowering interest rate caps significantly increases loan demand. We estimate that the $8 decrease, from $23 to $15 per $100, raised annual consumer surplus by roughly $28.6 million (2012 CAD). A further reduction to $14, starting in January 2025, would add another $3.9 million per year. These results suggest that stricter interest rate caps can yield substantial consumer welfare gains.