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.
As Bolen et al noted, the rate cap proved particularly difficult for blacks and Hispanics. Their research revealed that over 60 percent of black borrowers and 70 percent of Hispanic borrowers reported that after the law’s imposition they had been “unable to borrow money when they needed it.”
Most troubling of all concerns what these loans were needed for in the first place. In this case, it’s so often forgotten that we borrow money for what it can be exchanged for. Impoverished borrowers sought credit “to pay utilities, followed by debt consolidation, car payment/car repair, and rent/mortgage.” To reiterate, they needed money to pay for goods and services previously acquired or routinely acquired.
The needs of economically challenged borrowers rate consideration in terms of why the wealth unequal attain the wealth that makes them unequal. Most often their riches are a consequence of them turning immense scarcity into abundance. Consider something as modernly prosaic as the smartphone. While nowadays these veritable supercomputers are incredibly common in the U.S.’s richest and poorest zip codes, time was that basic wireless phones were a very distant luxury for all but the superrich.
If we travel back in time 1983, it was then that Motorola released its first cell phone. Some readers doubtless remember these brick-sized marvels with their half-hour of battery life, extraordinarily expensive calls, sketchy sound quality, not to mention nosebleed “roaming charges.” And then to own what was solely a phone, it set you back $3,995. The cost of these phones alone was status; as in if you owned one you marked yourself as extremely well-to-do. Fast forward to the present, and thanks to visionaries like the late Steve Jobs, exponentially more useful communication devices are commonly owned at a fraction of the price formerly charged.
It’s all a reminder that the very rich get that way by democratizing access to once costly goods and services. Translated, the surest path to remarkable wealth is to mass produce former luxuries.
All of this is useful to think about with credit extended (or not extended) to the needy top of mind. For one, it’s important to point out yet again that the democratization of goods and services is the path to reduced debt incurred when a purchase is made. Consider smartphones yet again. To walk into the store of most any wireless carrier today is to be inundated with all sorts of low-price deals meant to put technology in our pockets that the richest of the world’s rich could only dream of not too long ago.
From there, consider a major reason that we still purchase smartphones today: communication. No doubt these devices provide a range of services and features that continues to grow, but they’re still arguably about communication first and foremost. Important here is that in the past, it was very expensive to place a call on a wireless. Expensive calling plans were expensive precisely because they came with lots of “minutes.” Nowadays we text and call for next to nothing.
How this applies to the needy in a credit sense is that the bills they incur for accessing life’s necessities and luxuries will decline as the wealth of the producers of those necessities and luxuries grows. Second, the quality of the goods and services will rise in concert with the latter. Thinking about cars alone, it used to be notable when a car reached 100,000 road miles while now it’s an expectation. This is something to think about with the “why” behind subprime borrowers borrowing well in mind. If the quality of goods improves, the cost of maintaining necessities and luxuries will go down.
After which, it’s important to think about savings in general. The rich, by virtue of being rich, have abundant savings. Short of stuffing their excess under the proverbial mattress, they must put it to work. Assuming more savings born of rising inequality, the latter will redound to those with the least via more wealth put to work in pursuit of all manner of returns. Put another way, more savings in pursuit of returns will logically push down the cost of accessing those savings for all.
It all speaks to a simple, but unsung truth: the path to lower cost of goods, services, and credit for the poor is soaring wealth creation. The wealth creation is a sign that attainment of necessities and luxuries is growing easier and easier for those whose spending power is most limited. Indeed, while legislators can in no way achieve cheaper credit through force, the rich can achieve lower-cost everything for everyone ahead of becoming rich.