South Carolina is debating implementing a 36 percent rate cap on short-term loans. If successful, it would be the 19th state to implement the 36 percent cap. Proponents of the legislation claim it will prevent predatory lending and protect consumers. Yet upon evaluating the effects of similar actions in other states, it becomes clear that the very people this measure aims to help will be harmed the most. The evidence demonstrates that a cap does not protect short-term borrowers but removes their access to legal loans entirely, forcing them to seek out credit through less desirable means.
Since the dawn of civilization, debates have arisen regarding the role and limitations of interest rates, with all Abrahamic religions addressing such practices as “usury.” In America, usury laws, which capped rates at around six percent in most states, hampered the development of a legal short-term loaning service. In its stead, low-income earners widely used illegal loan sharks, resulting in physical harm for failure to pay debts. The Uniform Small Loan Law of 1916 was established to give subprime borrowers a safe and legal credit alternative.
Since then, the debate has been reframed. Instead of short-term lending being an ethical alternative to loan sharks, it’s now deemed predatory. Forgetting why short-term lending exists, we are reverting to our previous system of usury laws, with the 36 percent rate cap being the most prominent example. Examining the results of these rate caps should remind legislators of why we first reformed lending in 1916.
Published in its entirety in Medium.