It may surprise you to learn that many of todays lenders are still working under the Uniform Small Loan Law of 1916. That’s right, the terms of many loans are dictated by a law that is 100 years old! No wonder the credit desert is very real for so many of us.

If that seems a little outdated to you, that’s because it is.

If it seems like a 100 year old law may be hurting the lending market instead of helping, that’s because it is.

Because of this very old law, America has become a credit desert for millions of people. Is there an oasis in this desert, or are we all stuck in the sand?

What is a Credit Desert

In 1916 the rate cap of 36% APR was established. That means that a lender cannot charge more than 36% of the principle borrowed for an entire year. If you borrow $1000, the interest cannot exceed $360.

This was done to combat “loan sharks” and make sure no one charged excessive interest to borrowers. Makes sense, right?

The problem is that banks and lenders have costs. They have overhead. They have bills to pay. Loaning out small amounts of money at 36% APR can actually cost them money. So many traditional lenders simply stopped loaning small amounts.

This has created a credit desert for small dollar loans.

If you want to negotiate a large-dollar loan, like a student loan or a mortgage, you have options. These loans for tens or hundreds of thousands of dollars generate a lot of revenue for lenders.

But if you are looking to borrow a few hundred dollars, or even a few thousand, you may entirely out of luck.

That 36% rate cap was intended to protect consumers, but its end result was to prevent working class people from having access to credit at all!

An Oasis in the Credit Desert

Traditional lenders have been driven from the market, but the need for low-dollar loans is still strong. This is why payday lenders, title lenders, and tribal installment lenders have become so essential to so many Americans: they are the only option left.

By raising this 36% rate cap, legislators can help to inspire a new wave of competition in the lending industry. Raising the rate cap won’t necessarily mean that interest rates will go up, but it will ensure that more lenders will be able to make small dollar loans.

The more lenders there are in the market, the more competition there will be. And that, in turn, will help keep rates from being artificially inflated.

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