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The Unintended Effects of Interest Rate Caps: Credit Rationing for Risky Borrowers

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In imperial China, 3 percent was the maximum legal monthly loan rate; charging more was punishable by 40 to 100 blows with the “light cane.” (Rockoff 2003) Centuries later, many U.S. states are imposing the same cap (without corporal penalties) on alternative credit providers, such as payday, installment, and auto-title lenders, with the goal of lowering credit costs and delinquency for the high-risk borrowers that rely on these funding sources. A concern, however, is that lenders will simply refuse to lend to these borrowers at lower interest rates. Our recent Staff Report studies how interest rate caps have played out in several states that recently adopted them. Using household-level data from a major credit bureau, we find that loan balances for the riskiest borrowers declined substantially relative to counterparts in states without caps. Despite taking on less debt, these borrowers did not experience an improvement in delinquencies.

Suggested Citation

  • Rajashri Chakrabarti & Gabriel Leonard & Donald P. Morgan & Thu Pham & Lee Seltzer, 2026. "The Unintended Effects of Interest Rate Caps: Credit Rationing for Risky Borrowers," Liberty Street Economics 20260603a, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:103389
    DOI: 10.59576/lse.20260603a
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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection

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