Today, the American Consumer Institute (ACI) released a new report anticipating negative effects on economic prosperity and opportunity in the case of government-mandated caps on short-term interest rates. An increasing number of states have restricted access to small-dollar loans with an interest rate of over 36 percent. Some federal legislators support extending that policy to the federal level via the Veterans and Consumers Fair Credit Act.

The projected outcomes of these regulations should give policymakers pause. Short-term loans are one of the few ways for Americans who are unbanked, underbanked or in other challenging financial situations to access credit. Without the ability to charge interest rates that account for the risks associated with lending to high-risk borrowers, more banks will stop offering credit to these consumers altogether. Faced with fewer options, vulnerable Americans could be forced to face riskier and more expensive alternatives like bank overdrafts and loan sharks.

In its new report, ACI advises that instead of leaving borrowers and lenders in a lurch, legislators should “craft a regulatory environment that does not deprive borrowers of access to short-term credit.” Rather than capping interest rates on short-term loans, policymakers should protect a diverse range of financial options for consumers, thereby giving consumers more choice in the capital market.

The complete report is available here.

Questions about ACI’s latest report? Email [email protected] to set up a conversation.