Working Paper

A New Look at the Effects of the Interest Rate Ceiling in Arkansas

Abstract: Arkansas has been a popular place to study the effects of rate ceilings because of its exceptionally low interest rate ceiling. This paper examines the effects of the Arkansas rate ceiling on credit use by risky nonprime Arkansas consumers, which are especially vulnerable to credit rationing because of the low ceiling. We compare the level and composition of consumer debt of nonprime consumers in Arkansas with that of prime Arkansas consumers and also nonprime consumers in the neighboring states. We find that nonprime Arkansas consumers are less likely to have consumer debt and, conditional on having debt, have lower, but not much lower, levels of consumer debt than prime Arkansas consumers and nonprime consumers in neighboring states. Types of credit used by nonprime Arkansas consumers tend to differ from those of our comparison groups. Notable is much lower use of consumer finance loans, traditionally an important source of credit for higher risk consumers. This finding suggests rate-based rationing of risky consumers. Also notable is lower use of bank credit despite federal preemption of the rate ceiling for banks. This result is consistent with banks’ traditional avoidance of risky lending.

Keywords: Consumer Credit; Access to Credit; Interest Rate Cap; Financial Regulation;

JEL Classification: D14; G20;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2021-07-30

Number: 2021-045