The Lesson from Illinois

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.

In a study entitled “Effects of Illinois’ 36 percent Interest Rate Cap on Small-Dollar Credit Availability and Financial Well-being,” J. Brandon Bolen of Mississippi College, Gregory Elliehausen of the Board of Governors of the Federal Reserve System, and Thomas Miller of Mississippi State University found 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” and that the financial well-being of borrowers, particular subprime borrowers, worsened.  

The researchers examined the welfare effects of the loss of credit access using an online survey of short-term, small-dollar-credit borrowers in Illinois. Most borrowers answered that they were unable to borrow money when they needed it in the nine months following the imposition of the interest-rate cap.

The people who were unable to obtain a loan reported that they paid bills late and incurred late fees, that they had to borrow from family or friends, that they fell into debt collection, and that they were forced to pawn personal possessions, etc.  

The study found that indebtedness increased after imposition of the 36 percent interest-rate cap: Average loan sizes increased by 12 percent for prime borrowers, 25 percent for near-prime borrowers, and 31 percent for subprime borrowers.

At the same time, the study also found that Banks and Credit Unions barely increased the number of small-dollar loans to high-risk borrowers in the six months after the rate cap was imposed compared to the six months prior while other lenders decreased the same loans massively, showing how much the availability of credit to subprime borrowers contracted as a result. Indeed, overall, there were 45 percent fewer loans originated for subprime borrowers.  

Only 11 percent of the study’s survey 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.