Alaska legislators are considering a bill that would cap interest rates on loans under $25,000.
Supporters of SB 39 say it would protect consumers from predatory lending by capping payday loans that meet the threshold at annual percentage rates of 36 percent. However, critics warn that it could undermine smaller, short-term lending.
In 2019, Congress considered imposing a national interest rate cap of 36 percent. One analysis found that limits on borrowing run the risk of locking out millions of payday consumers. That would leave them with fewer legitimate options, thus creating conditions for loan sharking.
Thomas Miller, a professor of finance, warned in 2019 that a 36 percent interest rate cap would push “borrowers with poor, or nonexistent, credit histories toward other options,” including the use of “bank overdraft protection, deferring the payment of bills (and facing the resulting unpleasant consequences), and turning to unlicensed lenders known as loan sharks.”
As of 2024, 21 states and the District of Columbia prohibit payday lending completely, while others limit or restrict the practice. Montana, for example, restricts the maximum loan amounts to $300.
Nevertheless, limits on interest rates are popular. In a December 2024 LendingTree survey on credit card rates, six in ten respondents said they would support caps even if it meant less access to lending for those with less-than-perfect credit. That marked the highest response on record.
An alternative to rate caps might lie in limits on repeat borrowing. In a report published in 2021, Stanford University professor
Hunt Allcott advocated for a 30-day “cooling off” period for borrowers. That way, consumers would have access to credit but would be forced to repay outstanding loans instead of taking out additional lines of credit, placing themselves deeper in debt.
Government should not be involved in free enterprise. All banks by nature are predatory.
Government interference in the free market? What could possibly go wrong?
It’s not just interest rates, it’s the type of loan. There are installment, interest only, and revolving with revolving being the most flexible but the most predatory. There are usury limits on some loans but credit cards (revolving) often go into the upper 20 percentile.
Usury is evil. The government is right to restrain evil.