The cost of rate caps: Evidence from Arkansas

Onyumbe Enumbe Ben Lukongo and Thomas W. Miller

Journal of Financial Research, 2022, vol. 45, issue 4, 881-909

Abstract: Regulated small‐dollar installment lenders do not operate within Arkansas, but they do in all six states that border Arkansas. We can measure the effects of Arkansas' 17% interest rate cap because Arkansas residents obtain installment loans only from out‐of‐state lenders. On average, Arkansas residents borrow $1051 at an annual percentage rate of 93%, when incorporating travel costs. Arkansas residents borrow at a rate of 90.4 loans per 10,000 people, compared to 524.5 per 10,000 for residents of the six bordering states. Residents in Arkansas counties that border other states hold 96.7% of out‐of‐state‐supplied small‐dollar installment loans. Statistical tests confirm that the interest rate cap affects residents in the interior counties of Arkansas more than it does residents in the perimeter counties.

Date: 2022
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