50-State Survey Finds Larger Loans Need Lower Rates

March 6, 2024 — Press Release

Several States Imposed New Caps on Larger Loans, But Others Went in the Wrong Direction

WASHINGTON – Everything that is wrong with a high-cost loan is only made worse when the loan is larger and the terms are longer, according to a new report from the National Consumer Law Center, which flags interest rate cap increases in several states. New 36% rate caps in states that previously had no limits are an important step in the right direction, but advocates warn that a 36% interest rate that is reasonable for a small loan can lead to explosive and unaffordable interest on a larger loan. 

The report, Larger Loans Need Lower Rates: A 50-State Survey of the APRs Allowed for a $10,000 Loan, looks at 5-year, $10,000 loans and finds that, while a majority of states cap the interest rate and fees, many permit interest rates that are too high for these larger loans with longer terms. Three states that failed to cap interest rates at the time of NCLC’s 2018 survey have since enacted 36% rate caps, a rate that is still very high for loans of this size but a significant improvement nonetheless. Seven states have increased rate caps and weakened consumer protections over the same period, and a handful of others still fail to provide any protections at all. 

“While 36% has become the widely accepted metric for an affordable small dollar loan, states must recognize that it’s too high for larger loans,” said Andrew Pizor, senior attorney at the National Consumer Law Center and co-author of the report. “A borrower who repays a $10,000 loan over five years at 36% APR will face $11,680 in interest charges, repaying more than double the amount borrowed. For example, by increasing its rate from 25% to 36%, Oklahoma added over $4,000 to the cost of a $10,000, 5-year loan. And some states permit rates that are even higher.”

Forty-two states and the District of Columbia cap the interest rate and fees for a $10,000 loan, with a median cap of 27% APR. Six states, Alabama, California, Idaho, South Carolina, Utah, and Wisconsin, do not place any numerical cap on interest rates and fees for a loan of this size at all. These states only require that the interest and fees not be unconscionable–so high that they “shock the conscience.” Two states, Delaware and Missouri, have no interest rate limit or even a bar on unconscionability. 

The longer terms on larger loans amplify the impact of interest rates on a consumer’s ability to repay a loan and increase the risk that the consumer will fall into a debt trap. For example, if a $10,000, 5-year loan carries 36% interest, after a full year of payments the consumer will have only reduced the principal by $870. Borrowers in Nevada and Georgia are even more exposed, as state law allows excessive rates as high as 40% and 60%, respectively.

Since NCLC’s 2018 report analyzing loans of this size and duration, 12 states have made significant changes to their lending laws. The most dramatic positive changes were in New Mexico, North Dakota, and Virginia, where lawmakers and voters approved 36% rate caps in states that previously had none, and in Ohio, where the legislature closed a loophole that had enabled high-cost lenders to evade the state’s rate cap. 

Another seven states—Indiana, Kentucky, Michigan, Minnesota, North Carolina, Oklahoma, Tennessee, and Texas—went in the wrong direction by increasing their rate caps. Some of these states made relatively small increases of no more than one percentage point by applying inflation adjustments to fee caps.

Kentucky and Oklahoma, however, significantly increased their rate caps. Kentucky increased its interest rate cap for a 5-year $10,000 loan from 24% to 29%. And Oklahoma’s increase was even bigger. Oklahoma’s maximum rate increased from 25% APR to just over 36% APR, primarily due to new legislation adding the Federal Funds rate to the pre-existing maximum rates. That change adds over $4,000 to the cost of a $10,000, 5-year loan.

To protect consumers from high-cost lending, the report makes several recommendations for states, including that they:

• Cap APRs well below 36% for large loans, with rates decreasing as loan amounts increase; 
• Include all fees and payments in the APR limit, whether or not they are deemed “voluntary;”
• Prevent loopholes for open-end credit;
• Ban the sale of credit insurance and other add-on products and junk fees;
• Examine consumer lending bills carefully; and
• Include anti-evasion provisions to prevent lenders from laundering their loans through out-of-state banks to evade state rate caps.

“It’s important that states require lenders to evaluate the borrower’s ability to repay any credit that is extended,” said Lauren Saunders, associate director at the National Consumer Law Center. “States must also tighten up lending laws to prevent evasions, limit balloon and interest-only payments, and end excessively long loan terms.”

Related Resources

• NCLC’s High-Cost Credit Resources
• State Rate Caps for $500 and $2,000 Loans, November 2023
• Brief: After Payday Loans: Consumers Find Better Ways to Cope with Financial Challenges, March, 2022
• Brief: Why Cap Interest Rates at 36%?, August 2021