In a Senate Committee on Banking, Housing, and Urban Affairs hearing, Senator Jack Reed of Rhode Island asked the CEOs of prominent U.S. Banks about their support of a 36% cap on interest rates on consumer loans. The lineup of banks included Wells Fargo, JPMorgan Chase, Goldman Sachs, Citigroup, and Bank of America. There was no immediate rejection of the notion, and through tentative support, the CEOs voiced several views on the idea. The $14.9 trillion consumer debt in the U.S. comprised of several financial products to include:
- Student loans
- Auto loans
- And personal loans
In the hearing, all CEOs present expressed openness to the idea of the cap. Citigroup CEO Jane Fraser remarked “We absolutely don’t charge interest rates that high for our customer basis,” following the questions by the senator from Rhode Island. It is noteworthy that the cap would affect payday loans which can become expensive financial products.
Is a 36% Interest Rate high?
CEOs present in the May hearing echoed the sentiment that their loan products did not reach the 36% rate and would likely not be affected by the cap. The heads of financial institutes present that day indicated they would look more closely at the law to ensure it carried no unintended consequences. They also made clear that 36% was beyond the range of any of their loan products. Payday loans, however, maintain an average interest rate of 391%! Many are even priced higher than 600% and have been called predatory by some in the consumer credit industry. These lending businesses, which operate without federal restrictions, indicate that their model is a path to profitability for their product.
To lend some perspective, the average interest rate for consumer loans from institutions like the ones mentioned earlier is 9.41%. That is a far cry from the 600% interest rates consumers can face with payday or title loans.
States Which Currently Have a Cap on Interest Rates
The Center for Responsible Lending reported 18 states and Washington D.C. have a 36% rate cap. These efforts by many states aim to reduce harm from predatory lending. Most recently, Hawaii, Illinois, and Nebraska have joined that list. Other states are still contemplating legislation that would have a similar effect. The idea of these legislations is to limit the harm by what has sometimes been called predatory lending. That is to say, numerous loans that are issued to consumers come with loan terms frequently described as unfair and even harmful to the consumer. Some oppose rate caps, citing a lender’s inability to operate profitably and potentially face an end to their business. This end, opponents of the legislation suggest, could separate many consumers from options they may be using as their last resort. Consumers can borrow from businesses offering payday and title loans with as little as an ID and a bank account. The turnaround time of those loans is, according to experts, what has caused them to pose difficulty in repayment. Even still, many within the financial industry oppose legislation to implement a cap. Opponents frequently note that because of the potential limitations, it could adversely affect low-income communities. They indicate that many lenders cannot afford to lend at the suggested rate.
What is a good APR for a loan?
While the national average interest rate is 9.41%, a good APR for a loan is generally well below that. Borrowers whose credit rating, credit history and total debt as compared to income will be assessed when finding interest rates a consumer will be provided. Loan terms are also a valuable consideration for any prospective borrower. Fees of origination and due to late repayment over the life of the loan can become burdensome.
Consumer loans with favorable rates can even become less fiscally responsible options. The financial standing of the consumer plays a vital part in this. A borrower’s credit score and the history of their finances might allow them to secure a loan with an interest rate of 6%. This can equip the consumer with a line of credit that allows for the management of home expenses such as renovations, new furniture, to simply consolidating other higher-interest debts. Since personal loans often offer lower interest rates than credit cards, they can be a viable option for many and provide a single low-interest monthly payment.
What is the highest legal interest rate?
The topic of maximum interest rates is less of a “Yes” or “No” question than in past years thanks to the Credit Card Accountability Responsibility and Disclosure Act (CARD). The act supplies additional protection to credit card users. That protection means clearer disclosures on rates, a restructuring of how payments exceeding the minimum are applied, and even the elimination of some surprise fees. On the subject of personal loans, payday loans currently carry the highest legally allowable interest rates in states that do not already have restrictions or an interest cap in place. Ohio, at one time, had the highest payday loan interest rates at 667%.
What Would be the Effect of a Nationwide 36% Rate Cap on Credit Cards & Loans
Usury laws limiting the amount of interest that can be charged have been met with mixed views. CEOs of major banks have expressed some openness to them though there are objections from others in the industry. Amid varied predictions for what a rate cap on a national level might mean, there are suggestions that lenders could be required to offer bigger longer-duration loans. Borrowers could take on more debt or be pushed out of the market altogether.
Meeting the needs of consumers is the work of lenders and banks all over. Tailoring products to borrowers that are effective at their job and also manageable appears to be consistent with the values of responsible lending. Just how these institutions will adapt to a potential future with a 36% interest rate cap is still to be seen. If recent talk is any indication, there is still a strong desire to see credit and borrowed income used and lent responsibly.