Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez (AOC) have co-sponsored a bill that would cap consumer interest rates at 15 percent. The bill’s purpose is to ban payday loans and their lenders, which Sen. Sanders and AOC deem as “predatory.” But the attacks launched by these politicians are woefully misguided.
Capping interest rates will only hurt those this bill intends to help–low income Americans. Payday loans allow consumers to access fast cash when most needed. Considering nearly 40 percent of Americans cannot cover an unexpected $400 expense, having access to legitimate short-term loan options is increasingly important.
Because expenses often require more money than a customer has freely available, these credit unions must charge interest rates greater than 15 percent in order to keep making higher-risk, short-term investments like payday loans available.
With a rate cap, payday loan businesses would be faced with an impossible choice: either reduce access to more riskier customers or go out of business immediately. The extinction of payday loan lenders would leave many lower-income neighborhoods without any kind of financial institution. The result is a loss of small businesses and consumer access to financial resources.
Such a fate can be avoided if the government continues its role as a responsible steward of the payday loan market. With Kathy Kraninger, the recently appointed Director of the Consumer Financial Protection Bureau (CFPB), at the helm, we can be optimistic that it will.
Upon taking office, Kraninger established goals for improving the agency’s consumer education, regulation, and enforcement policies. But, if rate caps are enacted–as Sen. Sanders and AOC would like–it will be more difficult for Kraninger’s goals to be realized.
If Kraninger wants to increase access to credit and loans for all (which she did earlier this year by halting the restrictions on Payday lenders) she should step in and encourage Congress not to enact burdening interest cap rates.