A legislative proposal filed this year would reduce the borrowing options available to South Carolina consumers and could force lenders to leave the state. The Senate bill (S.518) would set a 36% cap on the annual percentage interest rate (APR) that can be charged for loans, which risks cutting off lending services to many with subpar credit.
SOUTH CAROLINIANS RELY ON ALTERNATIVE FINANCIAL SERVICES
Many South Carolina residents rely on alternative lending products provided by financial companies outside of traditional institutions like banks and credit unions. While banks and credit unions play important roles in the financial system, many residents still need the alternative lending sector to help manage their financial goals and needs.
- Nearly 7% of South Carolina households are unbanked and more than 16% are underbanked (meaning a person who regularly uses alternative financial services).
- While no state-specific breakdowns of race or ethnicity are readily available, a 2021 national survey showed that 11.3% of Black households and 9.3% of Hispanic households were unbanked, compared to 2.1% of White households. Additionally, 24.7% of Black households and 24.1% of Hispanic households were underbanked, compared to 9.3% of White households.
- There were nearly 1.2 million supervised loans to South Carolina consumers in 2020, most of which are provided by alternative lenders.
- 26% of South Carolina residents are not confident that they could take out a loan from a bank or credit union if they needed one, according to a recent Morning Consult survey.
RATE CAPS PRODUCE UNWANTED OUTCOMES
Rate caps on consumer loans, including those provided by the alternative lending sector, do not reduce the cost of borrowing for consumers. They only eliminate the lending products that many consumers need, reducing access to credit for those with lower credit scores, lower incomes, and virtually no options to obtain a loan from banks or credit unions.
Recent data from Illinois, which implemented a 36% rate cap in 2021, illustrates the various ways that consumers are negatively impacted by rate caps:
- An academic study found that the interest rate cap decreased the number of loans to subprime borrowers by 44% and increased the average loan size to subprime borrowers by 40%.
- About nine months after the rate cap went into effect, lenders surveyed their customers who had previously taken out loans with APRs above 36%. The survey revealed that nearly 80% of customers wished they could return to their lender if they had a funding need.
- According to the same survey, a majority of customers said they were unable to borrow money from a lender after the cap went into effect.
While it is undeniable that some face financial hardship because of debt, a statewide interest rate cap would not resolve nor prevent this issue. Instead, it would lead to fewer lending options available to South Carolina consumers, particularly those with less-than-perfect credit. A better solution, however, might involve putting a bigger focus on financial education in school and making more financial resources available to the public.
The data is fairly clear on this issue, and we would discourage the Legislature from advancing S.518 or any such bill that would impose an arbitrary statewide interest rate cap on lenders.