InsideSources cites CEI Director of Financial Policy and Senior Fellow John Berlau on interest rates:
With state efforts falling short of reining in tribal activities, activists have turned to federal lawmakers. Last year, Senate Democrats reintroduced a 2006 bill that would cap all consumer loans at 36 percent, despite analysis from the National Bureau of Economic Research indicating that such rates limit access to credit to those who need it most. Lenders need to charge at least 140 percent APR to break even on small-dollar loans, according to the Bank Policy Institute, which also said looking at annual rates is a poor way to analyze fees on short-term loans.
John Berlau, Director of Finance Policy and Senior Fellow at the Competitive Enterprise Institute agrees.
“The APR is a flawed, outdated measure of the cost of short-term credit that leads many cash-strapped consumers to misunderstand available options. Worse, by distorting the policy debate, the APR leads politicians at both the federal and state level to propose banning these options at the expense of borrowers in poverty.
“As an example of the APR’s distortion, consider a two-week $200 consumer loan with a $40 interest charge. This loan has a 20 percent interest rate if paid back within its duration. But if this loan is extended a full year, which rarely if ever happens, the annual interest rate would be 520 percent. Yet federal law mandates that 520 percent be disclosed as the official rate of interest for this loan. As the great economist Thomas Sowell points out, ‘Using this kind of reasoning—or lack of reasoning—you could … say a hotel room rents for $36,000 a year, [but] few people stay in a hotel room all year.’
“For the sake of those who truly need short-term small-dollar credit, policymakers should not let the distortion of the APR inform the debate.”
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