Alaska Rejects Price Controls on Interest Rates 

On June 24^th, Alaska Governor Mike Dunleavy vetoed SB 39, a bill that would have capped interest rates for loans under $25,000 at 36%. This move deserves praise as a win for consumers and borrowers with exceptional and urgent needs for short-term credit.  

In a memo related to the veto, Governor Dunleavy rightly underscored key concerns about how the bill would impact access to short-term credit and emergency loans.  

Interest rate caps are a textbook example of bad economic policy. Price controls distort market forces under the guise of consumer protection against predatory lending. Despite proponents’ claims, the bill would hurt borrowers. Payday lending and alternative forms of consumer credit are often last resort lifelines for individuals needing emergency assistance to pay bills or cover emergency expenses.  

Interest rates are a proxy for lending risk. Individuals with higher credit scores enjoy lower rates on credit cards, mortgages, and auto loans for this reason. Lenders demand higher rates of return for taking on greater risk. Payday lenders charge higher interest to recoup the cost of a potential default or missed payments from borrowers with the highest risk profiles.  

By capping interest rates at a certain threshold, the most deprived borrowers would be cut off from accessing emergency credit. The policy signals that high-income individuals and corporations, which are already well-capitalized (and thus have the least need for credit), are the only entities that can be deemed creditworthy. According to the FDIC, 18% of U.S. households are either unbanked or underbanked. Underbanked and low-income individuals are the most frequent users of payday lending services. 

Price controls in any form have repeatedly proven to be ineffective policy measures. According to one paper examining Illinois’s 36 percent APR cap, the measure “decreased the number of loans to subprime borrowers by 38 percent and increased the average loan size to subprime borrowers by 35 percent.” A survey discussed in the paper found that the “interest-rate cap worsened the financial well-being of many of [the small-dollar-credit] borrowers.” 

On the federal level, price controls on interest have failed to induce their intended outcomes. Prior to 1980, the Federal Reserve’s Regulation Q imposed interest rate caps on bank deposit accounts. Regulation Q was gradually phased out between 1980 and 1986. According to a document published by the St. Louis Fed, “Congress concluded that interest rate ceilings created problems for depository institutions, discriminated against small savers, and did not increase the supply of residential mortgage credit.” 

More recently this year, Senators Josh Hawley and Bernie Sanders introduced a bill that would cap credit card APRs at an unreasonably low 10%. This ceiling would have calamitous effects on consumer credit. A study on the bill found that its enactment could lead to over 80% of credit card holders losing access to credit altogether. Borrowers with credit scores below 740 would effectively be placed in a losing situation.  

Legislation proposed to cap interest rates in a bid to frame predatory lending as a boogeyman has failed time and again. Distorting market price signals always creates tangible losses for consumers in the form of reduced services.  

Governor Dunleavy took the appropriate course of action in vetoing a poorly construed bill that would have created unwanted ramifications for financially insecure consumers. By rejecting SB 39, Alaska reaffirmed its commitment to protecting a free-market system that enables all people to access critical financial services, not just the well off.