Why caps on debt interest rates may not help consumers save

The increase in credit interest rates made the debt burden even more expensive.

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

The report examines the effects of an earlier policy, the 2015 expansion of the Military Loan Act, which also extended a 36% cap on annual percentage rates on revolving credit such as credit cards and overdrafts.

But the changes have not effectively resulted in improved consumer protection, according to Urban Institute research.

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

The research focused on individuals with subprime credit scores because they are more likely to have higher APRs when they take on debt and are therefore more likely to be affected by those rate caps.

Since 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 of the Urban Institute’s Financial Well-Being Data Hub.

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“Based on the research, we found that it didn’t have much of an effect at all on credit and debt outcomes among residents of military communities, particularly those with subprime credit scores,” Garon said.

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Military community residents with subprime credit scores saw no significant 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.

Service members with subprime credit scores also saw no change in their credit scores.

“Harmful effects for the most vulnerable”

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

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

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

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

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

Based on the research findings, policymakers may want to consider other changes to increase consumer protections instead of the 36% limit, according to the Urban Institute.

For example, rate disclosure can help borrowers better understand the costs of borrowing over time, which research has shown can help discourage them from taking out payday loans.

Also, when loan terms allow for payments in installments over six months, rather than in one lump sum, borrowers can spend 42% less to pay off those debts, the report found.


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