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

50 Pages Posted: 3 May 2019

See all articles by Onyumbe Lukongo

Onyumbe Lukongo

Southern University

Thomas Miller

Mississippi State University - Department of Finance and Economics; George Mason University - Mercatus Center

Date Written: October 12, 2018

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

Suggested Citation

Lukongo, Onyumbe and Miller, Thomas, Adverse Consequences of the Binding Constitutional Interest Rate Cap in the State of Arkansas (October 12, 2018). Mercatus Research Paper. Available at SSRN: https://ssrn.com/abstract=3381910 or http://dx.doi.org/10.2139/ssrn.3381910

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

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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