Rate Ceilings and the Distribution of Small Dollar Loans from Consumer Finance Companies : Results of a New Survey of Small Dollar Cash Lenders

Research conducted many years ago that indicated substantial cost economies of loan size in consumer lending. This finding implies that low interest rate ceilings make small loan sizes unprofitable and will not be available in the marketplace. Furthermore, research indicates that demanders of small cash loans tend to be relatively risky and to face binding limits on the amount they can borrow at relatively low rates. These rationed consumers may benefit from additional credit, even credit at relatively high rates. New data on small installment cash lending are consistent with the hypotheses of this previous research. Nearly all of the loans are extended to risky borrowers, who clearly are subprime on the basis of their credit scores. The annual percentage rates of interest for these loans are high because of their small size and the riskiness of the borrowers. Differences in the availability of smaller loan sizes vary directly with the height of state interest rate ceilings. States with high ceilings for smaller loan sizes have many small loans. States with low ceilings have few such loans. Finally, average APRs on surveyed loans reflect the pattern of rates recommended by the National Commission on Consumer Finance (1972) based on its cost analyses and conclusion that completion would cause rates to reflect costs of production rather than rise to the maximum allowed by law