Home > posts > New Study: Government Restrictions Targeting Short-Term Lenders Only Bring More Pain to Working Americans
January 10th, 2023 11:50 am
New Study: Government Restrictions Targeting Short-Term Lenders Only Bring More Pain to Working Americans
Posted by Print

As the global economy slows, inflation remains elevated and wages fail to keep pace, we continue to emphasize how government regulators targeting short-term lenders only end up hurting the people they claim to be helping.

Now, a stark new study just released by Gregory Elliehausen of the Federal Reserve among other authors hammers home that point.  Namely, new laws artificially capping interest rates resulted in surveyed borrowers themselves saying that borrowing money when they needed it only became more difficult.  “Disapprobation of high interest rates,” the study begins, “reflects a longstanding and widely held belief that lenders take advantage of needy individuals by charging high interest and imposing harsh terms.”  Their work clearly found, however, that government mandates manifesting that disapprobation inflicted even greater pain:

[W]e find that the interest-rate cap decreased the number of loans to subprime borrowers by 44 percent and increased the average loan size to subprime borrowers by 40 percent.  We examine the welfare effects of the loss of credit access using an online survey of short-term, small-dollar-credit borrowers in Illinois.  Most borrowers answer that they have been unable to borrow money when they needed it following the imposition of the interest rate cap.  Further, only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender.  Thus, the Illinois interest-rate cap of 36 percent significantly decreased the ability of small-dollar credit, particularly to subprime borrowers, and worsened the financial well-being of many consumers.”  (Emphasis added.)

Rather than harming the very working Americans they claim to be helping, government officials at the federal, state and local levels need to increase access to small-dollar credit by first doing no harm.

 

 

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