June 1, 2016

The Demonization of 36 Percent APR

Thomas W. Miller, Jr.

Senior Affiliated Scholar
Summary

Competition guarantees that the borrowers will receive loans at the lowest possible cost and highest possible customer service—in both large- and small-dollar loan markets.

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In addition to Google's recently announced ban on payday loan ads, an update shared by David Graff, director of global product policy, says: "In the U.S., we are also banning ads for loans with an [Annual Percentage Rate] of 36 percent or higher." It looks like Google is jumping onto the 36 Percent Rate-Cap Bandwagon.

This "36 percent and no more" mindset stems from a passing familiarity with large-dollar installment loans – particularly for automobiles and mortgages: With installment loans, the borrower knows in advance the size, number and frequency of the equal payments and the APR. Importantly, an installment loan "amortizes" – that is, part of each payment reduces the amount owed.

The competitive market for these large-dollar loans clears at a lower interest rate – meaning, these loans can be supplied to borrowers at a lower rate because the lenders make a risk-adjusted profit at these rates.

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