Adverse Consequences of the Binding Constitutional Interest Rate Cap in the State of Arkansas

Abstract

In the United States, the lowest interest rate cap on small-dollar installment loans—17 percent—is in Arkansas. No small-dollar installment lenders operate within Arkansas, while they do in all six states bordering Arkansas—providing a natural experiment to examine the effects of a binding interest rate cap. Arkansas residents obtain installment loans from lenders in other states. Arkansas residents in the perimeter counties hold 96.8 percent of these loans. We document an installment loan “credit desert” in the interior counties of Arkansas. Overall, Arkansas residents borrow $1,051, on average, and freely contract at 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