Capping Short-Term Interest Rates: A Recipe for a Long-Term Disaster
Short-term loans have become the perennial bogeyman of America’s financial system. Routinely decrying these loans as predatory toward low-income Americans, state legislatures, federal agencies, and the U.S. Congress have proposed gratuitous regulatory reforms and legislation that would cap interest rates at 36%, effectively outlawing the practice. While these new proposals enjoy some support, few have considered the unintended consequences of such efforts.
The paper examines the role that short- term loans have in today’s financial system and the extent to which these loans offer American consumers access to capital not available through other sources. In particular, it highlights that interest rate caps could deny low-income and unbanked Americans access to credit while also forcing them into equally pernicious debt traps. This paper should serves as a clear warning about the dangers of imposing arbitrary caps on short- term loans, particularly for low-income and unbanked Americans who depend on access to short-term loans to make ends meet.
Read the full paper here – https://drive.google.com/file/d/1dfPPAtZpikRBTyWxC4aeCTF15Bx5TGus/view?usp=sharing