A Natural Experiment to Measure the Consequences of a Binding Interest Rate Cap

Abstract

In the U.S., Arkansas has the lowest interest rate cap on small-dollar installment loans, 17 percent. No small-dollar installment lenders operate within Arkansas, while they do in all six states bordering Arkansas. These facts provide a natural experiment to examine the effects of a binding interest rate cap because Arkansas residents actually obtain installment loans from out-state lenders. Arkansas residents in the perimeter counties hold 96.8 percent of these loans. Overall, Arkansas residents borrow $1,051, on average, and pay an average annual percentage rate (APR) of 80 percent. Incorporating estimated travel costs, the average APR is 93 percent.

Keywords: Installment Loans, Access to Credit, Interest Rate Cap

JEL Classification: D14, G21