Lawmakers across the country continue to misunderstand short-term loans. Demand for small dollar loans is high, and consumers rely on them to make ends meet when unexpected expenses hit. But lawmakers routinely decry these loans as predatory toward low-income Americans. State legislatures, federal agencies and the U.S. Congress have proposed regulatory reforms and legislation that would cap interest rates at 36 percent, effectively making it impossible for lenders to offer small dollar loans to consumers.

New research from Thomas W. Miller, Jr. (Mississippi State University), J. Brandon Bolden (Mississippi College) and Gregory Elliehausen (Board of Governors, Federal Reserve System) shows what really happens to loan access and consumer welfare when rate caps are imposed. In examining Illinois’s Predatory Loan Prevention Act (PLPA), the researchers found that the 36 percent interest rate cap on all loans under $40,000 decreased the availability of credit in IL and negatively impacted the financial health of consumers in the state.

Read the full report from ACI adjunct fellow and co-author of this report, Thomas W. Miller Jr., online here, and see below for key data points from the report. In addition, see here for a recent ACI study on the unintended consequences of capping interest rates.

Key Findings

  • There was a 44 percent decrease in the number of loans to subprime borrowers in IL, and the average loan size to subprime borrowers in IL increased by 40 percent.
  • The rate cap decreased the number of unsecured installment loans in IL by 17,930 loans.
  • Nearly 40 percent of respondents indicated that their financial wellbeing has declined since the imposition of the interest-rate cap, while only 11 percent of the respondents indicated that their financial well-being improved over the same period.
  • Banks and credit unions did not substantially increase the provision of small dollar credit to high-risk borrowers after the imposition of the IL rate cap. Banks increased the number of unsecured installment loans to subprime borrowers by 1,746 loans while credit unions decreased the number of unsecured installment loans to the same sample of borrowers by 1,175.
  • A decline in the number of loan originations as a result of the rate cap leads to a reduction in reporting to credit bureaus, thereby impacting the credit file of consumers.