A national interest rate cap has no place in the next coronavirus relief plan


As the economic fallout from the COVID-19 pandemic continues to wreak havoc, it is crucial that struggling Americans have access to affordable short-term credit. While bank loans and credit cards may offer financial relief to some, it is more important than ever that the millions of underbanked and unbanked consumers in this country have the opportunity to take out small loans, including including payday loans. In fact, a number of states with mandatory stay-at-home orders have found these lenders so vital to the economy that they have been declared essential businesses.

It is for these reasons that Congress should reject calls by Americans for Financial Reform (AFR) and other special interest groups to include a national interest rate cap of 36% annual percentage rate ( APR) in the next COVID-19 relief plan. Setting such an arbitrary limit on interest rates would inevitably bankrupt lenders and prevent millions of Americans already in difficulty from obtaining credit.

While these so-called consumer groups point out the triple-digit interest rates that payday lenders are supposed to charge, they are manipulating the numbers by failing to distinguish between short-term loans and those that last close to. a year.

For example, a lender who charges $ 15 interest on a two-week $ 100 loan charges an interest rate of 15% for the two-week term of the loan. Yet multiply that by 26 two-week periods in a year, and the annual percentage rate suddenly becomes 390%, even though nothing in the characteristics of the loan has changed. What the critics of payday loans leave out in their arguments is that few, if any, borrowers hold these loans for an entire year.

Now let’s move from multiplication to division to see why a 36% annual The interest rate would be totally impractical for small lenders and deny borrowers desperately needed loans. As IEC Principal Investigator John Berlau explains:

Many states have imposed APR limits of 36 percent or less. Although it may sound high, the key word is annual. Divided into 26 two-week periods, the usual length of most payday loans, that means payday lenders could only charge $ 1.38 on a $ 100 loan.

These groups also fail to understand that consumers who opt for payday loans have little or no choice. As recently argued by Tom Miller and Todd Zywicki of the Cato Institute’s Center for Monetary and Financial Inclusion:

A primary function of credit is to smooth consumption. More than a third of households earning less than $ 50,000 experience peaks and declines in income from month to month. Small credit products help them deal with unexpected expenses. The choice for these consumers is between using low-dollar credit products and simply without them.

A national interest rate cap has always been likely to hurt low-income borrowers – and this would be especially true during a pandemic and economic crisis where we need a flow of credit, not a credit crunch. .

In closing, I would like to reiterate what I said in March when the same special interest groups tried to pressure lawmakers to include an interest rate cap in the relief package. origin against coronaviruses:

A government-imposed interest rate cap would cripple consumer lending and further hurt already struggling Americans. Instead, lawmakers should consider deregulation measures that would remove barriers that hinder consumers and their ability to access affordable and much-needed credit.

Related articles and studies:

Congress should reject plan to use COVID-19 stimulus to impose interest rate cap

Democratic witnesses oppose interest rate caps

Interest rate caps are detrimental to financial inclusion; Banking partnerships spread inclusion around

The 400% loan, the $ 36,000 hotel room and the unicorn


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