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

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