Over the past few years, numerous states have imposed interest rate caps on consumer credit. In recent blog posts, we discussed the efforts of both Michigan and New Mexico to impose a 36% annual interest rate cap. Last year, Congress took up the discussion of a national 36% annual interest rate cap.
A recent study by J. Brandon Bolen, Mississippi College, Gregory Elliehausen, Board of Governors, Federal Reserve System, and Thomas W. Miller Jr., Mississippi State University examined the effects of the rate cap imposed by the Illinois Predatory Loan Prevention Act (PLPA) nearly two years after becoming law. In 2021, the PLPA became effective, imposing a 36% “all-in” annual interest rate cap on consumer loans made or offered by any person or entity, excluding banks and credit unions, to a consumer in Illinois. The study found that the 36% cap significantly decreased the availability of small-dollar credit in Illinois and worsened the self-reported financial well-being of many consumers.
To analyze the effects of the PLPA rate cap between Q4 2020 through Q3 2021, the study used quarterly credit bureau data and a borrower online survey regarding financial well-being. The survey was aimed at borrowers in Illinois who were known users of short-term, small-dollar credit and whose previous lenders no longer operate in Illinois.
To determine the effects of the 36% cap, the study estimated the number and average size of unsecured installment loans that would have been made in Illinois if the 36% cap had not been imposed. It did so by comparing data for Illinois with data for Missouri (which has no rate cap). The study assumed that because the number and average size of unsecured installment loans in Illinois and Missouri followed parallel trends before imposition of the 36% cap, they would have continued without the imposition of the cap. In the six months following the imposition of the rate cap, the number of unsecured installment loans in Illinois increased by 15% whereas the number of loans in Missouri increased by 27%. Thus, the study’s statistical analysis is based on the assumption that, had no rate cap been imposed in Illinois, the volume of unsecured installment loans would have also increased in Illinois by 27%.
Assuming the number of loans in Illinois would have increased at the same rate as Missouri, the imposition of the rate cap resulted in an 8% decrease in the number of loans relative to the number of loans provided in the six months prior to imposition of the rate cap. Most notably, in the six months following imposition of the rate cap, the number of loans to subprime borrowers decreased by 44%. Subprime, high-risk borrowers primarily rely on unsecured installment loans covered by the PLPA.
Other key findings from the study include:
- All lender types (including those exempt lenders under the PLPA) originated significantly fewer unsecured installment loans to subprime borrowers in the six months after imposition of the rate cap than in the six months prior to the rate cap’s imposition. The rate cap decreased the volume of loans in Illinois by 8% relative to the number of loans in the six months before the rate cap’s imposition.
- The average loan size (in dollars) increased across all borrower risk categories after the imposition of the rate cap. This finding is consistent with the notion that a larger loan size is needed to make “small loans” profitable at the 36% annual interest rate cap.
- In the six months following imposition of the rate cap, the number of loans to prime borrowers increased by 20%, while average loan size increased by 7%, indicating borrowers with better credit histories experienced less of a reduction in access to credit than borrowers with poor credit histories.
- 39% of survey respondents indicated that their financial well-being had declined since their previous lender stopped offering loans in Illinois, 79% of survey respondents indicated that they wanted the option to return to their previous lender if they had a funding need, and nearly 60% of survey respondents reported that they had been unable to borrow necessary funds since March 2021.