The Unintended Effects of Interest Rate Caps: Credit Rationing for Risky Borrowers

Rajashri Chakrabarti, Gabriel Leonard, Donald P. Morgan, Thu Pham and Lee Seltzer

No 20260603a, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: 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.

Keywords: usury limit; household debt; consumer finance (search for similar items in EconPapers)
JEL-codes: D12 D18 (search for similar items in EconPapers)
Date: 2026-06-03
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DOI: 10.59576/lse.20260603a

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