Missouri residents are a proud group; we are unwaveringly and unequivocally loyal to our home state, its sports teams, and its traditions. We do things a certain way (the right way!)—whether it’s barbecue or baseball—and we will vigorously defend our methods against any and all challengers. Our willingness to show the best way of doing things is evidenced in our motto: The Show Me State.
While it’s easy to extol the virtues of our method of cooking meats or our multiple championship-winning sports teams (especially the Chiefs, who have appeared in three of the last four Super Bowls, notching two wins) –it’s a little less common for Missourians to tout the superiority of our financial system. A recent academic study offers an opportunity to do so and I will gladly take it.
For the last two years, Illinois—our neighbor to the Northeast—has had an interest rate cap of 36 percent on consumer loans in the state. It’s been an abject disaster, as lenders have fled the state and consumers have experienced real harm as their options to access credit vanished nearly overnight. Only 11 percent of Illinois residents in a recent survey said that their financial well-being has increased since the rate cap went into effect, with nearly eight-in-ten respondents expressing a wish to return to their previous lender—now forced out of the state.
A new paper published by three leading economists compared credit bureau data for Illinois with that of Missouri; which shares a number of key similarities with Illinois, without the foolhardy imposition of an annual interest rate cap that threatens consumers’ financial well-being. As the study authors wrote, “the key assumption of our study is that the credit experience of Missourians is an appropriate counterfactual for what the credit experience of Illinoisians would have been if the 36 percent interest rate cap had not been imposed.”
The results were striking, although not entirely unpredictable. The economists found that eliminating credit products from the marketplace has the overall effect of reducing credit access for consumers who need it. This is evidenced by the sizeable difference between the number of unsecured installment loans that they forecast would have taken place in the absence of a rate cap and the number that have actually taken place since the rate cap’s imposition.
On top of that, the average size of unsecured installment loans from all lenders has risen dramatically in Illinois when compared to the forecast of the average size sans rate cap. In other words, consumers are being forced to take out loans for higher amounts—often more than they need—in an effort to make the interest rate math work.
Some days it seems like the reasons that Missouri is superior to Illinois are too numerous to count. In baseball, for example, I’ll take the Cardinals over the Cubs any day. But Missouri also has a long history of creating an environment that gives consumers choices when it comes to credit access and in allowing innovative companies to provide valuable services to Show-Me State borrowers.
Illinois used to be on even footing with us in that regard. But since they imposed their interest rate cap two years ago, financial services has just become the latest area where Illinois lags behind Missouri. Perhaps Illinois should follow our lead.
host of Stacy on the Right airing nightly on SiriusXM satellite radio, serves as President of ShareNetMinistries. Stacy is Emmy nominated for her work on television and an award winning author of “Eternally Cancel Proof”.
