As interest rates climb, here’s why proposed caps on debt may not help reduce costs for consumers


Rising credit interest rates have made it even more expensive to carry debts.

But a proposal in Congress that would cap rates on consumer loans at 36% may not be an effective way of curbing those higher costs of borrowing, according to new research from the Urban Institute’s Financial Well-Being Data Hub.

The report examines the effects of a previous policy, the 2015 expansion of the Military Lending Act, which also extended a 36% cap on annual percentage rates for revolving credit such as credit cards and overdraft lines of credit.

But the changes did not effectively result in enhanced consumer protections, the Urban Institute’s research found.

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One key reason why: The average APR on revolving loans was 17%, based on credit bureau data on residents of military communities with subprime credit scores.

The research focused on individuals with subprime credit scores because they are more likely to have higher annual percentage rates when they borrow, and therefore be affected by caps on those rates.

Because lenders were already charging rates at or below 36%, the policy did not affect their rates.

“It was well intentioned,” said Thea Garon, associate director at the Financial Well-Being Data Hub at the Urban Institute.

“Based on research, we found it did not have much of an effect at all on credit and debt outcomes among residents of military communities, specifically those with subprime credit scores,” Garon said.

Military community residents with subprime credit scores did not see meaningful changes in credit card ownership, the research found.

Borrowers with subprime credit scores also did not see a decline in delinquency or collection rates on revolving loans.

Nor did service members with subprime credit scores see changes to their credit scores.

‘Detrimental effects on the most vulnerable’

Importantly, those with the lowest subprime credit scores of less than 500 may have seen reduced credit access.

“The policy may have had detrimental effects on the most vulnerable consumers,” Garon said.

A bill put forward in Congress called the Veterans and Consumers Fair Credit Act seeks to implement a 36% cap on debt for veterans and other consumers. The policy would apply to both closed- and open end credit products.

The Democratic proposal has support from a coalition of 188 organizations.

“Extending this 36% APR cap to all forms of revolving credit would be unlikely to improve debt and credit outcomes for all borrowers, not just for those in military communities,” Garon said.

Based on the findings of the research, policy makers may want to consider other changes to boost consumer protections rather than the 36% cap, according to the Urban Institute.

For example, fee disclosures may help borrowers better understand the costs of loans over time, which research has shown may help discourage them from taking payday loans.

Moreover, when payday loan terms allow for installment payments over six months, rather than in one lump sum, borrowers may spend 42% less to repay those debts, according to the report.



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