A group of Senate Democrats has introduced the Protecting Consumers from Unreasonable Credit Rates Act, which would set a 36 percent annual percentage rate (APR) cap on consumer loan fees and interest. Supporters say the bill is aimed at stopping unregulated and predatory lending practices that can trap consumers in cycles of debt.
However, the American Financial Services Association (AFSA) warns that this measure could limit access to credit for many working Americans, especially those in lower- and middle-income brackets. According to AFSA, "While we appreciate the goal of barring unregulated and predatory actors from taking advantage of consumers and forcing them into unending cycles of debt, this legislation will actually prevent millions of hard-working consumers, including lower- and middle-income households, from accessing safe and regulated credit products."
The organization cites findings from the Federal Reserve’s report on small-dollar loans. The report indicates that a blanket 36-percent APR cap may push consumers to borrow more than they need or qualify for larger loans only, resulting in higher total finance charges and longer repayment terms. This could increase overall costs despite a lower APR figure.
AFSA also points to research on Illinois’ recent adoption of a similar rate cap. The study found that after Illinois enacted its 36 percent all-in rate cap, several lenders left the state. As a result, subprime borrowers had fewer loan options available—specifically, there was a 36 percent reduction in available loans for these borrowers. Deep subprime borrowers were affected even more significantly.
AFSA argues that lenders with strict underwriting standards should be able to offer affordable credit tailored to individual budgets rather than relying solely on an “all in” APR approach. The association’s Case For Credit initiative seeks to inform consumers about traditional installment loans as a means to meet their financial needs while noting that APR alone does not determine whether a loan is affordable.
"Consumers would be forced to borrow a higher amount than they need or want (if they even qualified for a larger loan), resulting in higher finance charges, longer repayment periods, and higher overall costs, despite the appearance of a lower APR on their loan," AFSA stated.
"It is essential for lenders, which have rigorous underwriting standards, like traditional installment lenders, to be able to provide affordable credit products that fit a customer’s budget rather than misusing the 'all in' APR methodology proposed in this legislation. AFSA’s Case For Credit aims to educate the public about how traditional installment loans have helped consumers meet their unique credit needs and why APRs do not determine whether a loan is affordable," according to AFSA.