Policymakers have rightly intensified their focus on affordable credit access for low- and moderate-income consumers, and banks want to serve those communities’ needs. Legislation proposed in Congress would impose a 36 percent rate cap on consumer loan interest rates. But that limit applied arbitrarily across the full spectrum of consumer credit products would constrain safe, affordable small-dollar lending offered by banks that helps low-income consumers cover emergency expenses. Rate cap proponents often quote interest rates using APR, a widely-used measure in consumer loans, but, when used to illustrate the overall cost of small-dollar, short-term loans, APR can make the cost of those loans appear misleadingly high. For example, a $500, 3-month loan that costs $55 would have a 44% APR, whereas a $100, 3-month loan that costs $35 has a 140% APR. Both rates are far lower than the typical payday loan rate, as noted in this data. In order to help meet the financial needs of vulnerable consumers living paycheck-to-paycheck, banks want to offer responsible small-dollar loans with a simple and transparent pricing structure as a safe alternative to predatory and reckless payday lenders. The following infographic explains how much it can cost for a bank just to break even on a small-dollar loan and how APR may be a misleading depiction of their affordability. The proposed rate cap legislation could hinder banks’ ability to offer certain types of these safe alternatives to payday loans by essentially requiring them to take a loss – rather than break even – on some of these products.
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