The Reality Of A 36 Percent Rate Cap For Personal Loans

Consumer protection advocates in the United States have been hard at work in recent months pursuing ways to legislate a federal rate cap on personal loans that would likley be at or below 36 percent. While this may appear on the surface to be a good thing for consumers the issue is far more complex than most people realize. The answer to the question of whether a high interest rate or a low interest rate is better is obvious, but the result of an interest rate cap mandated at 36% isn’t so obvious. The end result is that the some 23 million people who used a short term loan last year will have no place to turn to make ends meet. The truth is that if loaning at 36% was profitable the banking industry would have come in and muscled out the fintechs, but they didn’t. The Federal Deposit Insurance Corporation conducted an experiment to see if a 36% rate cap was viable but in the end it was a failure. The pilot program was discontinued.

The lenders who provide credit access to these consumers are operating on smaller margins than a lot of people realize due to the high rate of loan default. When a lender provides credit to a consumer without collateral and without a credit check they are taking a tremendous risk. This is the reason that the annual percentage rates are high. If everyone paid these loans as agreed, the loan providers could operate at 36% but the reality is that 80-90% default rates are not uncommon and supporters of this type of legislation refuse to consider that fact. These consumers aren’t worth pursuing in the event of default due to the costs incurred in legal action types of recovery methods. In many cases the loan just goes unpaid and is written off. With the potential of drastically reduced margins, the likely outcome is that these lenders will leave the space and seek profits elsewhere leaving millions of consumers with little to no other options when facing financial shortfalls.

Fortunately, in the current climate, there are still alternatives for those in need of a short term loan to prevent bank fees, late fees and other types of negative outcomes due to financial emergencies. If you are interested in learning more you can visit for a quick overview of how these loans work and what the typical requirements are. There are plenty of consumers who value these relationships and appreciate having a place to turn when unexpected expenses arise. Used responsibly, short term loans proved relief for families all across the country and having the freedom to choose these options should not be regulated out of existence.