Credit for me but not for thee: The effects of the Illinois rate cap

39 Pages Posted: 2 Jan 2023 Last revised: 3 Jul 2023

See all articles by J. Brandon Bolen

J. Brandon Bolen

Mississippi College

Gregory Elliehausen

Board of Governors of the Federal Reserve System

Thomas W. Miller, Jr.

Mississippi State University; Consumers' Research

Date Written: June 29, 2023

Abstract

On March 23, 2021, Illinois imposed an all-in rate cap of 36 percent APR. 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 38 percent and increased the average loan size to subprime borrowers by 35 percent. Responses to a survey of small-dollar-credit borrowers in Illinois who lost credit access suggest the interest-rate cap worsened the financial well-being of many of these borrowers. Legislators motivated by genuine public interest rationales might not recognize the harmful consequences of their actions for these higher-risk borrowers with few credit alternatives. Legislators might also be motivated by the benefits of the interest-rate cap for lower-risk borrowers. The interest-rate cap increased the number of loans to prime borrowers by 16% and the average loan size to prime borrowers by 7%.

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

JEL Classification: D04; D12; G23

Suggested Citation

Bolen, J. Brandon and Elliehausen, Gregory and Miller, Jr., Thomas W., Credit for me but not for thee: The effects of the Illinois rate cap (June 29, 2023). Available at SSRN: https://ssrn.com/abstract=4315919 or http://dx.doi.org/10.2139/ssrn.4315919

J. Brandon Bolen

Mississippi College

Gregory Elliehausen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2326 (Phone)

Thomas W. Miller, Jr. (Contact Author)

Mississippi State University ( email )

Mississippi State, MS 39762
United States

Consumers' Research ( email )

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