Rate Caps Do Not Work
Yesterday, former President Donald Trump was out on the campaign trail talking about the tough economic times Americans have been experiencing over the past few years. In his remarks he said, “While working Americans catch up, we’re going to put a temporary cap on credit card interest rates. We’re going to cap it at around 10%. We can’t let them make 25 and 30%.”
As AFSA has consistently noted, including in our recent Consumer Credit Confidence Index survey, consumers are taking serious hits to their paychecks and wallets with ongoing inflation, layoffs, and economic uncertainty. There is similar uncertainty in the consumer credit industry, which helps generate trillions of dollars in economic activity each year. And rate caps on credit card interest are not the answer to improving the economic ailments here in the U.S.
The facts on rate caps of any kind are clear: they are unworkable and actually harm the consumers policymakers are trying to help, by limiting the types of credit tens of millions of Americans depend on more than ever. Several academic studies have proven that the data backs up concerns about rate caps tightening access to credit to the Americans who need it the most.
- Research shows the Illinois rate restriction decreased the number of loans to subprime borrowers by 38 percent and increased the average loan size to subprime borrowers by 35 percent.
- According to the Federal Reserve’s report on the Economic Well-Being of U.S. Households and the FDIC National Survey of Unbanked and Underbanked Households, 19% of Americans are unbanked or underbanked and need strong competition in the nonbank market.
- Researchers at the World Bank recently conducted a comprehensive review on the theory and practice of interest rate caps, and found that they can be harmful in six ways:
- Increases in non-interest fees and commissions
- Reduced price transparency
- Lower credit supply
- Loan approval rates for subprime borrowers
- Lower number of financial institutions and reduced density
- Adverse impacts on bank and institution profitability
Some might argue that a temporary rate cap on only one form of credit would have a limited effect. But anyone that knows Washington knows that what one day is temporary and limited doesn’t stay that way. The Spanish-American War tax was supposed to be limited. And more than 100 years later, the Treasury Department was still collecting that monthly tax from consumers who had phone service. There is little doubt that once the proverbial rate-cap camel sticks its nose under the credit tent, it will be fully inside in no time.
We fully support pro-consumer policies that give consumers more choices and flexibility for their finances. AFSA member companies were front and center during the recent pandemic, ensuring that their customers had the financial flexibility they needed during the lockdowns.
But rate caps on credit products are not the solution American consumers need. It’s important the policymakers understand this, which is why AFSA has been engaging with policymakers and the campaigns on the important role of credit to our nation’s economy, consumers, and businesses alike.
September 19th, 2024
