The Effects of Usury Laws: Evidence from the Online Loan Market
40 Pages Posted: 28 Jan 2014
Date Written: June 2012
Usury laws cap the interest rates that lenders can charge. Using data from Prosper.com, an online lending marketplace, I investigate the effects of these laws. The key to my empirical strategy is that there was initially substantial variability in states’ interest rate caps, ranging from 6% to 36%. A behind-the-scenes change in loan origination, however, suddenly increased the cap to 36%. The main findings of the study are that higher interest rate caps increase the probability that a loan will be funded, especially if the borrower was previously just "outside the money." I do not find, however, changes in loan amounts and default probability. The interest rate paid rises slightly, probably because online lending is substantially, yet imperfectly, integrated with the general credit market.
Keywords: Person-to-Person Lending, Consumer Credit, Usury Laws, Financial Market Regulation
JEL Classification: G21, G28, L81
Suggested Citation: Suggested Citation