What They Are Saying: Research Shows Interest Rate Caps Harm Consumers, Limit Choice

WASHINGTON, D.C. – Senators Bernie Sanders (I-Vt.) and Josh Hawley (R-Mo.) introduced legislation this week that would place government price controls on credit cards, a measure that would severely restrict the availability of this type of credit for everyday consumers. Here’s what researchers are saying about how and why this proposal would harm consumers and limit choice:

Government Researchers

In Illinois, Federal Reserve Board researchers found that “the interest-rate cap decreased the number of loans to subprime borrowers by 38 percent.” And again that, “the interest-rate cap worsened the financial well-being of many of these borrowers.” The authors found that “lower rate caps nearly always reduce the amount of credit extended, especially to high-risk households.”

Third Party Researchers

The World Bank Group conducted extensive research on the unintended consequences of rate caps, including a study examining rate cap policies in at least 76 different countries finding that these policies resulted in “withdrawal of financial institutions from markets” and “an increase in the total cost of the loan.”

Perhaps the title of this research paper puts it best: “Interest rate caps around the world: still popular, but a blunt instrument.”

Academic Researchers

In Oregon, a Dartmouth researcher found that interest rate caps “caused deterioration in the overall financial condition of Oregon households,” and that “the results are consistent with restricted access harming, not helping, consumers on average.”

In Arkansas, researchers consistently found that the state’s 17 percent rate cap increased total consumer costs, steered consumers to worse alternatives, and limited access to credit for the subprime borrowers who need them most.

Thought Leaders 

“Should it become law, the Sanders-Hawley legislation would not make the need for credit disappear. Since credit card availability would shrink dramatically as a result of this bill, consumers seeking credit would likely be relegated to arguably less appealing option such as payday loans, pawn shops, and rent-to-own plans for items such as electronics and appliances. While there is nothing inherently wrong with these options, consumers should have the choice of credit cards if they agree to the interest charges.” – John Berlau, Director of Finance, Competitive Enterprise Institute

“Unfortunately, a recent proposal to cap credit card interest rates will inadvertently deny temporary financial resources to families dealing with price hikes that outpace pay increases. Expect more defaults, bankruptcies, ruined credit histories, and reliance on disreputable black-market lenders — that is, loan sharks — as government moves to dry up the supply of credit.” – Joel Griffith, Research Fellow, Heritage Foundation

CBA Advocacy

• To learn more about how rate caps hurt the very consumers they’re supposed to protect, click HERE.
• To read our blog post examining the myths and facts of how credit card interest rate caps harm consumers, click HERE.
• Visit WashingtonWalletWatch.com to learn more about how government price controls on credit harms consumers.