On March 23, 2021, the Predatory Loan Prevention Act became law in the state of Illinois. Billed as a way to protect needy borrowers from allegedly rapacious lenders, the law capped interest rates charged to subprime borrowers at 36 percent.
Missed by lawmakers was that markets always have their say, and that’s true even when laws are passed to mute their power. In this case, and as many readers can likely imagine, the quick effect of interest-rate caps was to reduce the amount of credit extended to the most economically challenged borrowers. As economists J. Brandon Bolen, Gregory Elliehausen, and Thomas Miller documented in a 2022 study, the number of loans extended to subprime borrowers subsequently fell 30 percent. Importantly, the pain didn’t stop there.
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