Protecting or Preventing? How Rate Caps Deny Credit

Protecting or Preventing? How Rate Caps Deny Credit

A small group of Senate Democrats recently introduced the Protecting Consumers from Unreasonable Credit Rates Act, which would cap fees and interest on consumer loans at an APR of 36 percent. While we appreciate the goal of barring unregulated and predatory actors from taking advantage of consumers and forcing them into unending cycles of debt, this legislation will actually prevent millions of hard-working consumers, including lower- and middle-income households, from accessing safe and regulated credit products.

The Federal Reserve's report on small-dollar loans confirms the downsides of an across-the-board 36-percent APR rate cap. Consumers would be forced to borrow a higher amount than they need or want (if they even qualified for a larger loan), resulting in higher finance charges, longer repayment periods, and higher overall costs, despite the appearance of a lower APR on their loan. In addition, a recent study, Effects of Illinois' 36% Interest Rate Cap on Small-Dollar Credit Availability and Financial Well-being, found that after the state enacted a 36 percent, all-in rate cap, several lenders left the state entirely. This reduced the number of loans available to subprime borrowers by 36 percent (29,000); 57 percent (4,700) of deep subprime borrowers were hit even harder.

It is essential for lenders, which have rigorous underwriting standards, like traditional installment lenders, to be able to provide affordable credit products that fit a customer's budget rather than misusing the "all in" APR methodology proposed in this legislation. AFSA's Case For Credit aims to educate the public about how traditional installment loans have helped consumers meet their unique credit needs and why APRs do not determine whether a loan is affordable.

September 17th, 2025