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The Effects of Usury Laws: Evidence from the Online Loan Market

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  • Oren Rigbi

    () (Ben-Gurion University of the Negev)

Abstract

Usury laws cap the interest rates that lenders can charge. Using data from Prosper.com (an online lending marketplace), I show how interest rate caps affect: 1) the probability that a loan is funded; 2) the amount a borrower requests; 3) the interest rate at which a loan is funded; and 4) loan repayments. The key to my empirical strategy is that there initially was substantial variability in states' interest rate caps, according to which Prosper borrowers from different states faced caps ranging from 6 to 36%. A behind-the-scenes change in loan origination, however, suddenly increased the cap to 36% in all but one state. This change, which was not pre-announced, creates \treatment" states where caps rose and a few control states where caps remained unchanged. I find that higher interest rate caps increase the probability that a loan will be funded, especially if the borrower is risky and previously was just \outside the money." I do not find, however, that borrowers change the loan amounts they request or that their probability of default rises. On the other hand, the interest rate paid rises slightly, probably because online lending is substantially, yet imperfectly, integrated with the general credit market.

Suggested Citation

  • Oren Rigbi, 2012. "The Effects of Usury Laws: Evidence from the Online Loan Market," Working Papers 1204, Ben-Gurion University of the Negev, Department of Economics.
  • Handle: RePEc:bgu:wpaper:1204
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    References listed on IDEAS

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    1. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 217-251.
    2. Rajkamal Iyer & Asim Ijaz Khwaja & Erzo F. P. Luttmer & Kelly Shue, 2016. "Screening Peers Softly: Inferring the Quality of Small Borrowers," Management Science, INFORMS, vol. 62(6), pages 1554-1577, June.
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    4. Seth M. Freedman & Ginger Zhe Jin, 2011. "Learning by Doing with Asymmetric Information: Evidence from Prosper.com," NBER Working Papers 16855, National Bureau of Economic Research, Inc.
    5. Rob Alessie & Stefan Hochguertel & Guglielmo Weber, 2005. "Consumer Credit: Evidence From Italian Micro Data," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 144-178, March.
    6. Villegas, Daniel J, 1982. " An Analysis of the Impact of Interest Rate Ceilings," Journal of Finance, American Finance Association, vol. 37(4), pages 941-954, September.
    7. Maurice B. Goudzwaard, 1968. "Price Ceilings And Credit Rationing," Journal of Finance, American Finance Association, vol. 23(1), pages 177-185, March.
    8. Miller, Sarah, 2015. "Information and default in consumer credit markets: Evidence from a natural experiment," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 45-70.
    9. Scott Carrell & Jonathan Zinman, 2014. "In Harm's Way? Payday Loan Access and Military Personnel Performance," Review of Financial Studies, Society for Financial Studies, vol. 27(9), pages 2805-2840.
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    Cited by:

    1. Rajkamal Iyer & Asim Ijaz Khwaja & Erzo F. P. Luttmer & Kelly Shue, 2016. "Screening Peers Softly: Inferring the Quality of Small Borrowers," Management Science, INFORMS, vol. 62(6), pages 1554-1577, June.
    2. Avi Goldfarb & Shane M. Greenstein & Catherine E. Tucker, 2015. "Introduction to "Economic Analysis of the Digital Economy"," NBER Chapters,in: Economic Analysis of the Digital Economy, pages 1-17 National Bureau of Economic Research, Inc.
    3. Freedman, Seth & Jin, Ginger Zhe, 2017. "The information value of online social networks: Lessons from peer-to-peer lending," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 185-222.
    4. repec:spr:elcore:v:17:y:2017:i:4:d:10.1007_s10660-016-9247-2 is not listed on IDEAS
    5. JJ. Cao-Alvira & LG Deidda, 2013. "Financial liberalization and the development of microcredit," Working Paper CRENoS 201324, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    6. Dongyu Chen & Xiaolin Li & Fujun Lai, 0. "Gender discrimination in online peer-to-peer credit lending: evidence from a lending platform in China," Electronic Commerce Research, Springer, vol. 0, pages 1-31.
    7. Seth M. Freedman & Ginger Zhe Jin, 2011. "Learning by Doing with Asymmetric Information: Evidence from Prosper.com," NBER Working Papers 16855, National Bureau of Economic Research, Inc.
    8. Miller, Sarah, 2015. "Information and default in consumer credit markets: Evidence from a natural experiment," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 45-70.

    More about this item

    Keywords

    Person-to-Person Lending; Consumer Credit; Usury Laws; Financial Market Regulation;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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