Critics of short-term lending often rally around a call to cap consumer loan interest rates at 36 percent. But in a recent post on the American Banker website, two scholars show why interest rate caps don’t work and aren’t financially feasible.
Thomas M. Miller Jr., a finance professor at Mississippi State University and a visiting scholar with the Mercatus Center George Mason University, and Chad Reese, assistant director of outreach for financial policy at Mercatus, write that “regulations limiting interest rates are the latest in a long series of misguided legislation and regulations that limit or deny access to important consumer credit products. Interest rate caps, like other price controls, have severe unintended consequences.”
In their column Miller and Reese addressed new regulations recently announced by the Obama administration that would expand the Military Lending Act of 2006, which caps some short term loans to military personnel at 36 percent. OCLA members don’t make loans to military personnel. But consumer groups and others have called for 36 percent interest rate caps on all consumer loans, including those made by OCLA members to millions of Ohioans, so the arguments made in the column easily translate to concerns over rate caps on other types of consumer loans.
“Is a 36 percent annual interest rate for a small-dollar loan too high?” Miller and Reese wrote. “Those who say ‘yes’ likely have a worldview shaped by large-dollar home mortgages or auto loans. But people need to borrow money for many reasons. Millions of Americans rely on nonbank-supplied small-dollar loans to meet wide-ranging credit demands like durable goods purchases or for unexpected automobile repairs.”
“With or without (short term lenders),” the scholars wrote, “the demand for short-term credit will still exist.”
To learn more about how capping interest rates on small term loans is bad policy and not feasible, read the entire article at: