2 posts on "Donald P. Morgan"
June 3, 2026
The Unintended Effects of Interest Rate Caps: Credit Reallocation to Safer Borrowers
Several states have recently capped consumer loan rates with the stated purpose of protecting borrowers. In a recent Staff Report, we study how these interventions have played out in three states. In our first post about that study, we showed that rate caps lead riskier borrowers to face rationing in the credit market. One question that naturally arises is what lenders do with the credit they used to provide to high-risk borrowers before the caps were imposed. Lenders that lend exclusively to high-risk borrowers (at rates above the cap) may decide to stop lending to high-risk borrowers in that state. Others, however, may try to change their “credit box” by lending more to somewhat safer borrowers. In this post, we will try to understand how lenders reallocate credit after usury limits are implemented.
The Unintended Effects of Interest Rate Caps: Credit Rationing for Risky Borrowers
In imperial China, 3 percent was the maximum legal monthly loan rate; charging more was punishable by 40 to 100 blows with the “light cane.” (Rockoff 2003) Centuries later, many U.S. states are imposing the same cap (without corporal penalties) on alternative credit providers, such as payday, installment, and auto-title lenders, with the goal of lowering credit costs and delinquency for the high-risk borrowers that rely on these funding sources. A concern, however, is that lenders will simply refuse to lend to these borrowers at lower interest rates. Our recent Staff Report studies how interest rate caps have played out in several states that recently adopted them. Using household-level data from a major credit bureau, we find that loan balances for the riskiest borrowers declined substantially relative to counterparts in states without caps. Despite taking on less debt, these borrowers did not experience an improvement in delinquencies.
RSS Feed
Follow Liberty Street Economics
