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

42 Pages Posted: 26 Oct 2017

See all articles by Onyumbe Lukongo

Onyumbe Lukongo

Southern University

Thomas Miller

Mississippi State University - Department of Finance and Economics; Consumers' Research

Date Written: October 25, 2017

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

Suggested Citation

Lukongo, Onyumbe and Miller, Thomas, A Natural Experiment to Measure the Consequences of a Binding Interest Rate Cap (October 25, 2017). Available at SSRN: https://ssrn.com/abstract=3059563 or http://dx.doi.org/10.2139/ssrn.3059563

Onyumbe Lukongo

Southern University

United States

Thomas Miller (Contact Author)

Mississippi State University - Department of Finance and Economics ( email )

Mississippi State, MS 39762
United States

Consumers' Research ( email )

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