Is a 36% Cap Radical?

I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.

Is a federal 36% cap radical? Historically, 36% would seem heinously high. Plus, if 36% is radical, why does much of the U.S.‘s eastern seaboard's state law forbid consumer loans with interest rates of over 36%? Are these radical states? The public favors a hard cap, over and over again in every study,  regardless of politics. Hearing politicians support consumer loans with 500% or even 1,000% interest, is so mysterious it makes me want to look at their list of campaign contributors.  Remember, real people over political contributions. We elect politicians and pay their salaries. In turn, they speak for us. Do you like what they are saying?

Comments

[Tom]

I could easily see a "x percent over fed funds rate" cap. The high rates of the late 70s were the excuse for some states to set themselves up as usury-friendly places to set up a post-office box while really operating elsewhere.

But yeah, if you're paying above 36% in today's economic environment then borrowing money is probably the last thing you should be doing.

[Mike]

Bankers must be charged with UCC violation code. Citizen arrest everyone from supervisor to the top of the ladder President and CEO.

[Paul]

Greenberg, in his suit on behalf of AIG shareholders charges that the govt's 14% lending rate was "extortion." It is so unfair that it is a taking with out due process, thus necessitating $40 billion compensation.
I think the suit is without merit, but 14% is apparently too high, even when a (corporate) person is clueless and makes themselves insolvent and an international embarrassment.
So, max needs to be less than 14%...

[whatever]

Sure. Do it. Of course, it will reduce the supply of credit to at least some people and when someone can't buy food at the end of the month because all those evil payday lenders are dying off, you will be busy celebrating your victory to notice.

There are always tradeoffs. Know that.

But it's always way more fun to focus our attention on the most immediate, easiest issues we can spot and worry about the more distant consequences never.

[Ryan Nevin]

Even 36% seems like usury. I'd prefer a mandated cap at 19.99% (typical credit card rate). And to the comment above, these payday lenders are not helping people, but putting consumers in a worse position.

Recent studies show that the borrower has to take out loans to pay off the first one and they end up in a downhill spiral with ever-increasing fees. The borrower ends up either filing bankruptcy, or paying off the loan with help from family, friends, or church, which is where they could've and should've gone to in the first place.

There needs to be a cap on payday lenders rates/fees.