Measuring the Consequences of a Binding Interest Rate Cap on Small-Dollar Installment Loans

Abstract

Regulated small-dollar installment lenders do not operate within Arkansas, but they do in all six bordering states. We can measure the effects of Arkansas' 17 percent interest rate cap because Arkansas residents obtain installment loans only from out-state lenders. On average, Arkansas residents borrow \$1,051 at an APR of 93 percent, when incorporating travel costs. Perimeter county residents hold 96.8 percent of out-state supplied small-dollar installment loans and interior county residents hold 3.2 percent. Robustness checks show that nonprime borrowers in the interior counties have less access to all sources of credit than do prime borrowers in the perimeter counties.