News & Resources

An argument against interest rate caps

Dec 29, 2014 Sean Albert

Whether people have to pinch pennies around the holidays or face an unexpected expense in the middle of the summer, sometimes consumers have to contend with troubling economic times. What they decide to do when handling these issues, however, is what separates resourceful individuals from the rest of the pack.

Luckily for many consumers in this post-Great Recession United States, they have more options than just toughing through it or pursuing a loan from a bank - that is, if they can get one.

However, when it comes to alternative finance, not everyone sees eye to eye. A number of lawmakers believe that short term loans and other similar products should have interest caps tacked on. That being said, they may not be aware that when these restrictions are in place, the consumer ultimately loses out. When laws of this nature are passed, many companies can't offer these types of loans, and if they try to, the businesses tend to have trouble paying employees or overhead charges, which puts a lot of people in an even more difficult spot.

Lenders shouldn't stand for this - they have to speak up if they want to fight against the unwarranted caps. Luckily, some have already started making their arguments known.

Why isn't a cap a good idea?
A recent opinion piece in the Albuquerque Journal detailed why placing caps on alternative credit products isn't always a wise decision. The source suggested that region-wide restrictions of this nature actually often cause more problems than they claim to solve.

Namely, the source claimed that there are a number of types of loans that are harmful to consumers. Despite the fact that many, if not most, short term lenders are an alternative and equally valid source of quick cash for consumers, people must do their homework. Companies need to make sure they're upfront and clear about policies to borrowers from day one.

The newspaper explained that if an all-encompassing cap is placed on alternative financial products, both good money options will no longer be available to those searching for them, "... thus wiping out access to both the potentially problematic and the potential solution," the Journal detailed.

Moreover, the news source explained that this will trap borrowers in a corner. A rate cap would mean that individuals wouldn't be able to tap into low-cost loans - companies simply won't offer them because they cannot make a profit. That then means consumers will have to take out larger loans, even if they don't want or need a bigger sum.

Other possibilities
Short term loans aren't the only alternative option that those who need money have in their wheelhouse. For instance, people can head down to the local pawn shop and put up items as collateral in order to secure a loan. Somewhat similarly, a car title lender will allow consumers to use the titles of their cars as collateral when they're looking for a sum. Perhaps the best thing about this choice is that individuals get to retain possession of their vehicles even when the money is being borrowed.

Another possibility is an installment loan, something that a lot of people end up turning to. Borrowers are given a specific amount of money in the form of a loan, then they pay the sum back in pre-set increments over a certain amount of time. Generally, even where short term loans face strict regulations and interest caps, installment lenders can still operate.

These types of loans are also viewed favorably among financial experts. For instance, according to the piece in the Journal, traditional installment loans, "... have none of the bad characteristics that could get borrowers into trouble."

No matter what consumers are looking for, there are numerous types of products legitimate lenders can offer their clientele.