Loan Sharks? Interest rate cap would hurt those it’s designed to help

Original Article via Gazette Staff, Texarkana Gazette

May 20, 2019

U.S. Sen. Bernie Sanders, I-Vt., and U.S. Rep Alexandria Ocasio-Cortez, D-N.Y., have an idea they think would do the public a lot of good.

And it looks OK on paper. But the reality doesn’t measure up.

Their idea is to put a maximum interest rate of 15 percent on credit cards. That sounds good in theory. Who wouldn’t like to stick it to those greedy bankers and Wall Street types? But it’s not that simple.

“There is no reason a person should pay more than 15% interest in the United States,” Ocasio-Cortez said last week.

Well, yes there is.

People need credit. Unfortunately, their credit records don’t always work to their favor. Higher interest rates are the way banks control risk. Those with lower credit scores pay higher rates for access to credit. The higher rates make up for the risk of default.

If the banks can’t control risk, they simply will not grant credit to anyone without a top-notch score. And that means millions of Americans won’t be able to get credit or will lose the access to credit they now have.

Reduced access to credit would mean less spending. That’s bad for the economy as a whole.

The 15 percent cap would also apply to so-called fringe bankers, such as payday lenders. But there again the high rates make up for the considerable risk of lending to those without good credit or much in the way of assets. As much as those type of loans cost, they are often the only credit a low-income borrower has. A payday loan could mean the difference between having electricity or doing without. It could mean you can buy both medicine and food, instead of choosing one or the other. It could mean you can get your car repaired instead of losing a job because of lack of transportation.

Banks have little interest or incentive to make such small loans. And they aren’t set up to give loans to those with bad credit.

This type of legislation strikes the right emotional chords. But a 15 percent interest rate cap would hurt those Sanders and Ocasio-Cortez are trying to help.