January 24, 2020 | CFSA Commentary
By D. Lynn DeVault
The Journal Gazette's Jan. 14 editorial (“Lending change/Cap rates, end impasse on payday loans”) erroneously asserts that an arbitrary 36% interest rate cap on short-term loans will protect consumers when, in fact, the opposite is true. The move would restrict access to credit for Indiana consumers and potentially force them to seek dangerous alternatives.
History has proven that arbitrary caps do not work. Dozens of financial institutions have tried to introduce cheaper substitutes for loans considered high cost, only to eliminate the products from their portfolios. The Federal Deposit Insurance Corp. also experimented with a 36% interest rate cap, but the loans simply weren't profitable enough for banks to continue offering the product.
The editorial fails to mention that consumers in South Dakota, which instituted a rate cap in 2016, have been worse off in recent years, according to several key financial indicators.
A National Financial Capability Study conducted by the Financial Industry Regulatory Authority found that more South Dakotans reported having medical bills overdue and only paying the minimum on their credit cards in 2018 than in 2015, before the rate cap was in effect.
Rather than restricting access to loans that customers value and forcing them into worse outcomes, policymakers should work toward real financial inclusion and ensure that all Hoosiers have access to legal and licensed sources of credit. Contrary to popular belief, small-dollar loans are also often the least expensive form of short-term credit, particularly when compared with bank fees or unregulated offshore internet loans and penalties for late bill payments.
Read more in the Journal Gazette.