A small group of populist members of Congress, including Senators Bernie Sanders (D-VT), Jack Reed (D-RI), J.D. Vance (R-OH), and Josh Hawley (R-MO), as well as Rep. Alexandria Ocasio-Cortez , have introduced various legislative proposals that would impose government caps on fees and interest for credit cards and consumer loans. Here’s how they would harm consumers.
INTEREST RATES
Government Price Controls on Credit Harms Consumers
Consumers on the margins will be pushed out of the well-regulated banking system.
Empirical data shows that rather than protecting consumers, interest rate caps harm borrowers with high debt burdens by reducing access to credit, which can increase loan defaults and limit access to emergency credit.
Eliminating lenders’ ability to prudently price loans for the risk involved will result in access to credit cards being limited to consumers who have high income and credit scores and pose little risk to card issuers.
According to July 2023 study examining how the imposition of an interest rate cap affects consumers of rate caps in Missouri and Illinois: “binding interest rate caps create loan deserts for some loan amounts — there is demand but no supply.”
There is no evidence that APR caps make consumers better off or save them money.
Credit cards are the primary vehicles for financial inclusion in the United States – and are one of the most highly regulated financial products available.
CFPB research shows that credit cards are, by far, the main way that “credit invisibles” become credit visible in the United States, allowing consumers at the margins to eventually qualify for auto loans, home loans, and other critical lending products.
What they’re saying about rate caps.
In the case of credit rate caps, it’s not hard to imagine that the highest income earners would suffer the least, while the lowest income earners—the people who most desperately need credit—would suffer the most.
In the end, the rate caps would cause problems that provide additional pretense for more price controls and government intervention, both of which tend to further hinder the effectiveness of markets in the first place.”
Cato Institute’s Center for Monetary and Financial Alternatives Vice President and Director Norbert Michel
“
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.”
Heritage Foundation Research Fellow in the Thomas A. Roe Institute for economic policy studies Joel Griffth
“
Senator Hawley’s proposal to put crippling price controls on consumers who use credit cards and the banks and credit unions that issue them should not be seen as ‘populist.’ Rather, the measure is an elitist attempt to substitute Hawley’s judgment of how much debt is appropriate in place of that of consumers weighing options for their families.”
Competitive Enterprise Institute Director of Finance Policy John Berlau
“
People who make regulatory decisions on behalf of borrowers are likely well intentioned, but many do not understand how small-dollar installment loans can help borrowers who face difficult financial circumstances. In Illinois, we found that the immediate effect of a 36 percent interest rate cap was to deny much-needed credit. Academic research like this study is essential for creating well-informed and effective regulation. Responsible lawmakers must fully understand and accept that their actions have consequences for consumers.”
Professor of Finance at Missouri State University Thomas Miller