On March 23, 2021 Illinois legislators imposed an interest rate ceiling of 36 percent on all non-bank and non-credit union loans under $40,000. The stated intent was to reduce the burdensome cost of interest for borrowers with less than prime credit scores. But as one would expect, markets speak even when lawmakers strive to blunt their message. Economists Thomas Miller (Mississippi State), J. Brandon Bolen (Mississippi College), and Gregory Elliehausen (Board of Governors, Fed), studied the subsequent impact of the cap, only to find that most subprime borrowers happened on a growing inability “to borrow money when they needed it.”
It's a reminder that price controls work, though not in the way that their proponents want them to. With the imposition of the cap, it was no longer affordable to lend to certain borrowers. As opposed to better off, the highest-risk borrowers in Illinois found they could not borrow the money they needed and that “their overall financial well-being had declined” in the aftermath of a market intervention falsely billed as compassionate.
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