Objective:
To ensure fair lending practices and protect consumers from excessively high interest rates, which can trap them in cycles of debt and financial instability, particularly following periods of economic downturn or unexpected unemployment.
Background:
Many consumers, especially those impacted by the COVID-19 pandemic, inflammation from the last 4 years and subsequent economic challenges, are experiencing severe financial hardship due to high-interest loans. Rates of up to 110% on consumer products, such as appliances, and credit card interest rates reaching nearly 30%, are leaving borrowers with monthly payments primarily directed toward interest rather than principal. For example:
• A washer and dryer purchase through American Freight accrues 110% interest if not paid in full within 90 days, creating significant financial strain on buyers.
• Credit card interest rates, as high as 29.4%, place consumers in prolonged repayment terms that lead to years of debt accumulation.
• Vehicle loan interest rates, often exceeding 15%, make it difficult for working Americans to afford essential transportation.
• Student loans and personal loans, once manageable, have ballooned in cost due to accumulated interest and fees, disproportionately affecting individuals who suffered employment interruptions during the pandemic.
Policy Recommendations:
- Implement an Interest Rate Cap
• Set a maximum annual percentage rate (APR) of 10% on consumer loans, including personal loans, credit cards, and auto loans, to prevent excessive interest charges on essential purchases and debt.
• For credit cards and other revolving credit products, establish a tiered cap based on the borrower’s income and ability to pay, with a top cap of 10% to ensure fair lending for higher-risk customers without overwhelming them with unmanageable debt.
- Enhanced Transparency for Short-Term Financing Plans
• Require clear disclosure on all short-term credit offers, such as those with deferred interest, as often seen with retailers like American Freight and Rent-A-Center. All terms must be explained in plain language, and caps on interest rates should be applied if a balance remains after the promotional period ends.
- Emergency Forbearance and Interest Rate Reduction Programs
• In times of economic downturn or pandemic-like events, provide automatic temporary rate reductions for borrowers impacted by unemployment or other verified financial hardships. This would allow interest rates on existing consumer debts to temporarily fall to 5% or below, giving struggling consumers a manageable way to stay current and avoid default.
- Reform of Penalty Interest Rates and Fees
• Establish limits on penalty rates and late fees across all consumer loans, ensuring they do not exceed a total of 5% of the outstanding balance. This cap is intended to prevent excessive compounding of debt due to missed payments in times of hardship.
Rationale:
Excessive interest rates and fees have created significant barriers for American consumers trying to regain financial stability post-pandemic. These rates, while intended to mitigate lender risk, ultimately trap borrowers in cycles of escalating debt. By capping interest rates and establishing clearer guidelines for high-risk financing and penalty rates, this policy seeks to balance the needs of lenders with the fair treatment of borrowers, helping Americans to work toward financial independence and security.