Effects of Illinois' 36% Interest Rate Cap on Small-Dollar Credit Availability and Financial Well-being

Abstract

Economic theory predicts that a binding interest-rate cap decreases credit availability for high-risk borrowers. On March 23, 2021, Illinois imposed an all-in interest-rate cap of 36 percent per annum for loans under $40,000 from non-bank and non-credit-union lenders. We use credit bureau data for Illinois and its neighboring state, Missouri, a state without any legislated interest-rate cap, to estimate the effects of the Illinois rate cap on unsecured installment loans. Using difference-in-differences-in-differences estimation, we find that the interest-rate cap decreased the number of loans to subprime borrowers by 44 percent and increased the average loan size to subprime borrowers by 40 percent. We examine the welfare effects of the loss of credit access using an online survey of short-term, small-dollar-credit borrowers in Illinois. Most borrowers answer that they have been unable to borrow money when they needed it following the imposition of the interest-rate cap. Further, only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender. Thus, the Illinois interest-rate cap of 36 percent significantly decreased the availability of small-dollar credit, particularly to subprime borrowers, and worsened the financial well-being of many consumers.

Keywords: Small-Dollar Credit; Interest rate cap; Installment lending

JEL Classification: D04; D12; G23