Bernie Sanders and Alexandria Ocasio-Cortez are promoting a new bill called the “Loan Shark Prevention Act.” The bill would cap credit card interest rates at 10%. They have bipartisan support from Josh Hawley of Missouri in the Senate and Anna Paulina Luna of Florida in the House. The coalition is marketing the proposal as a way to protect consumers from predatory lenders.
However, critics say it could severely impact private credit and push consumers towards government dependence. In the past, imposing strict interest rate caps on loans has often had unintended consequences. Access to credit can go down significantly.
Lending institutions may not be able to charge rates that make up for the risk of lending to higher-risk individuals. They may tighten their lending criteria or leave the market altogether. This leaves many consumers with fewer borrowing options.
Some may turn to unregulated and potentially riskier financial products or services. The idea behind the Loan Shark Prevention Act is to protect consumers from very high interest rates. However, critics argue that such a low cap on APR doesn’t match the operating realities of financial institutions.
Bipartisan support ignites heated debate
It could result in lower credit availability. Payday lenders, often accused of predatory tactics, may disappear.
But so might other sources of short-term credit that consumers rely on in emergencies. Hawley and Luna’s support shows the political appeal of the Act as a populist measure. It is designed to gain favor with voters fed up with high-interest rates on loans.
Nonetheless, the broader effects on consumer credit markets need careful scrutiny. If the credit supply is choked, more people could end up disenfranchised rather than protected. This goes against the Act’s intended purpose.
Any policy that affects credit markets must balance consumer protection with the realities of risk-based lending. Overly restrictive measures can lead to credit deserts, where mainstream financial services become inaccessible. This leaves vulnerable consumers with even fewer options.
The Loan Shark Prevention Act aims to protect, but it may ultimately undermine the broader credit system it seeks to reform.
