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The 36 percent interest rate cap proposed by many federal and state lawmakers would take away an important short-term credit option from millions of American families by eliminating the short-term loan industry. In fact, supporters of the 36 percent cap readily admit that the goal of the legislation is to ban the short-term loan industry entirely.
In Oregon, where legislators imposed a similar cap on short-term lenders, the cash advance industry was forced to close its doors to customers. A study surveyed cash advance customers in that state both before and after the law was passed and concluded that restricting access to these loans “caused deterioration in the overall financial condition of Oregon households.”
The study found that:
- The cap “dramatically reduced access to payday loans in Oregon” and as a result borrowers turned to “inferior substitutes:”
The number of licensed short-term lending outlets in Oregon fell from 346 in December 2006 [before the annual percentage rate cap] to 82 by September 2008.
“Former cash advance borrowers responded by shifting into incomplete and plausibly inferior substitutes,” primarily checking account overdrafts of various types and/or late bills. “These alternative sources of liquidity can be quite costly in both direct terms (overdraft and late fees) and indirect terms (eventual loss of checking account, criminal charges, utility shutoff.”
- Eliminating access to short-term loans hurts consumers’ employment and financial status:
“The Oregon Cap reduced the supply of credit for payday borrowers, and the financial condition of borrowers (as measured by employment status and subjective assessments) suffered as a result.”
“Reducing payday loan access in Oregon hindered productive investments or consumption smoothing that facilitated job retention (or search).”
“The proportion of respondents saying their financial situation had been getting worse in the last 6 months increased by 6 to 8 percentage points in Oregon relative to Washington.”
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