November 21, 2023 — Report

Caps on interest rates and junk fees are the primary vehicle by which states protect consumers from predatory lending. Forty-five states and the District of Columbia currently cap interest rates and loan fees for at least some consumer installment loans, depending on the size of the loan. However, interest rate caps vary greatly from state to state, some states allow lenders to pile on junk fees, and a few states do not cap interest rates at all. We recommend an airtight 36% interest rate cap for small loans and lower limits for larger loans.

Map 1: APRs Allowed for a Six-Month $500 Installment Loan

This map shows the maximum APRs allowed by the states for closed-end installment loans (loans in which the amount borrowed and the repayment period are set at the outset) by licensed non-bank lenders.

For a $500, six-month installment loan, 45 states and DC cap rates, at a median of 39.5% APR.
  • 19 states and the District of Columbia cap the annual percentage rate (APR) at
  • 36% or less.
  • 13 states cap the APR between 36% and 60%.
  • 13 states cap the APR at more than 60%.
  • Three states—Idaho, Utah, and Wisconsin—require only that the loan not be “unconscionable” (a legal principle that bans terms that shock the conscience).
  • Two states—Delaware and Missouri—impose no cap at all.

Map 2: APRs Allowed for a Two-Year $2,000 Installment Loan

This map shows the maximum APRs allowed by the states for closed-end installment loans by licensed non-bank lenders.

For a $2,000, two-year installment loan, 43 states and DC cap rates, at a median of 32.5% APR.
  • 33 states and the District of Columbia cap the APR at 36% or less.
  • 10 states cap it between 36% and 60% APR.
  • Five states—Alabama, Idaho, South Carolina, Utah, and Wisconsin—require only that the loan not be “unconscionable.”
  • Two states—Delaware and Missouri—impose no cap at all.

Why States Should Cap Interest Rates and Fees

Caps on interest rates and loan fees are the primary vehicle by which states protect consumers from predatory lending. In the absence of caps, exploitive lenders move into a state, overwhelming the responsible lenders and pushing abusive loan products that trap low-income consumers in never-ending debt.

“It was like I asked for help to dig out of this hole and just created a deeper hole for me to inhabit.”

NPR interview of Sarah Ahmed who borrowed $2,300 at 98% to rent an apartment and get her young son set up in an after-school program.

Interest rate caps are more than numbers: they are reflections of society’s collective judgment about moral and ethical behavior. Interest rate caps embody fundamental values. Interest rate caps also reflect an assessment about the upper limits of sustainable lending that does not undermine individual or societal economic stability. When states eliminate high-cost loans by imposing rate caps, consumers generally agree that they are better off and express relief that the loans are no longer available. Elimination of high-cost loans spurs an increase in affordable loans, benefiting all borrowers.

Rate caps also encourage lenders to ensure that the borrower has the ability to repay the loan. Excessive interest rates enable lenders to profit from loans even if many borrowers eventually default. Knowing that it will be made whole even if the borrower defaults, or that it can recoup defaults from exorbitant rates on others, the lender has little incentive to ensure that each borrower can actually afford to repay the loan in full on its terms.

High-cost loans, including high-cost installment loans, have a disproportionate impact on communities of color. Use of high-cost non-bank installment loans increased between 2021 and 2022 only for Black and Latino/Hispanic households, almost tripling for Black households. Payday lenders have long targeted these communities. High-cost loans do not promote financial inclusion. They add to debt, increase struggles, drive borrowers out of the banking system, and exacerbate existing disparities.

The APR is an Essential Standard for Measuring and Comparing the Cost of a Loan

The rates listed above are the annual percentage rates (APRs) as calculated under the Truth in Lending Act (TILA) for installment loans. The APR is a critical way to measure and compare the cost of a loan, because it takes both interest and fees, and the length of the repayment period, into account. Otherwise, lenders could pile junk fees on top of interest without reflecting the full cost of the loan in the APR.

For example, a $500 line of credit offered by a predatory lender in Pennsylvania in 2006 charged just 5.98% interest, but required a $149 junk fee every month, producing an actual APR of 431% if repaid over six months.

The APR provides a common, apples-to-apples comparison of the cost of two different loans, even if they have different rate and fee structures or are used to borrow different amounts for different periods of time. For example, a payday loan at 360% APR is 10 times more expensive than a 36% APR credit card would be if both were used to borrow $500 for 14 days. Some lenders have diverted attention from the APR to focus instead on the dollar cost. But $15 for a $100 loan is a lot more expensive if you only have the loan for two weeks and not a full year – just like a $100 car rental would be far more costly if one company gave it to you for one day and the other for two weeks.

The Military Lending Act (MLA), which places a 36% APR cap on loans to members of the military and their families, requires the APR to take into account not just interest and fees but also credit insurance charges and other add-on charges. The MLA is also far more accurate than TILA as a disclosure of the cost of open-end credit such as credit cards. Because of this, the MLA APR is the gold standard, both for purposes of cost comparison and for purposes of legal rate limits. However, because of the difficulty of identifying the cost of credit insurance and other add-ons allowed, in the abstract, by the various state laws (as opposed to calculating the MLA APR for a given loan), we have used the TILA APR rather than the MLA APR in the rates displayed above.

Why 36% for Small Loans, Lower for Larger Loans?

The 36% rate cap is a widely accepted measure of the top acceptable rate for a small dollar loan, and the rate has been broadly supported by both lenders and the general public.

But for loans in the thousands of dollars, 36% is too high. Interest increases dramatically with larger, longer loans, even if the rates are not in the triple digits. For example, in 2023 the Florida governor vetoed a bill that would have increased the rate for a $25,000 loan from a blended 20.5% rate to 36%—adding $14,076 in interest over five years.

Many states recognize the need for lower rates on larger loans by adopting tiered interest rate caps. For example, for loans up to $10,000, Alaska allows 36% on the balance up to $850, and 24% on the remainder, with no additional fees. For a five-year $10,000 loan the borrower will pay $7,766 in interest. If the state allowed 36% on the whole amount, the same loan would cost the borrower $11,680 in interest—almost $4,000 more.

Accordingly, a tiered structure that lowers rates as loans get bigger is appropriate.

Significant Changes in the States Since Mid-2022: Fewer Evasions, But More Junk Fees

Since mid-2022, Colorado, Connecticut, and Minnesota significantly strengthened their protections against evasions of their consumer lending laws. In addition, Colorado and Minnesota reduced the allowable APR on certain small short-term loans.

On the other hand, Alabama amended its consumer lending laws to allow an additional junk fee, and North Carolina increased both the allowable interest rate and the amount of a “processing fee.” Oklahoma expanded one of its high-rate lending laws so that it applies to larger loans, increasing the maximum APR for a two-year $2,000 loan from 34% to 54%. It also increased the interest rates allowed under its more general consumer loan law.

Details about the new laws:

Alabama weakened its protections against high-cost lending by authorizing another junk fee: a closing fee of 4% or $50, whichever is less, for loans of up to $1,500. (2022 H.B. 335). As a result, the maximum APR for a $500 6-month loan increased from 94% to 107%.

Colorado reduced the allowable finance charges for small short-term loans (2023 H.B. 23-1229), with the result that the maximum APR for a $500 six-month loan is now 78% instead of 91%. The same bill opted out of a federal law that allowed certain out-of-state banks to ignore Colorado’s interest rate caps when making loans in Colorado.

Connecticut substantially strengthened its protections against evasions of its consumer loan laws, making it even clearer that the state’s 36% APR cap encompasses all amounts a consumer pays in connection with the loan, and tightening restrictions on rent-a-bank lending. (2023 S.B. 1033).

Minnesota added strong protections against evasions of its lending laws, effective January 1, 2024. (2023 S.F. No. 2744). The bill also imposed a 50% APR cap for certain small short-term loans that are not covered by this report. Minnesota law formerly allowed APRs in the 90% range or higher for those loans.

North Carolina weakened its protections against high-cost lending by increasing both the maximum interest rate (from 30% to 33%) and a junk “processing” fee (from $25 to $30) for loans of 12 months or more for up to $12,000. (2023 S.B. 331). The result is an increase of the maximum APR for a two-year $2,000 loan from 31% to 35%.

Oklahoma expanded one of its high-cost loan laws to apply to installment loans of up to $3,450. Formerly it applied only to loans of $620 or less (2022 S.B. 1687). The result is that the maximum allowable APR for a $2,000 two-year loan increased from 34% to 54%. Of the states that cap APRs for a loan of this size and length, Oklahoma is now second only to Mississippi in the APR that it allows. The state also increased the maximum interest rate for consumer loans under one of its lending laws from 32% to 32% plus the federal funds rate. (2023 S.B. 794). It also announced an inflation adjustment for a “closing fee,” increasing it from $167.33 to $178.87.

Texas announced annual inflation-based increases to the allowable amounts of various fees for consumer loans. The increases only affect loans larger than those analyzed in this report, however.

See the full report for a table of earlier changes in state laws and a summary of our methodology.

Recommendations: A 36% APR Cap for Small Loans, Lower for Larger Loans

To protect consumers from high-cost lending, states should:

  • Cap APRs at 36% for smaller loans, such as those of $1,000 or less, with lower rates for larger loans.
  • Prohibit loan fees or strictly limit them to prevent fees from being used to undermine the interest rate cap and acting as an incentive for loan flipping.
  • Include all payments in the APR calculation, whether or not they are deemed “voluntary.” Some lenders have tried to disguise fees as purportedly voluntary “tips,” expedite fees, or donations.
  • Prevent loopholes for open-end credit. Rate caps on installment loans will be ineffective if lenders can evade them through open-end lines of credit with low interest rates but high fees.
  • Ban the sale of credit insurance and other add-on products, which primarily benefit the lender and increase the cost of credit.
  • Examine consumer lending bills carefully. Predatory lenders often propose bills that obscure the true interest rate, for example, by presenting it as 24% per year plus 7/10ths of a percent per day instead of 279%. Or the bill may list the per-month rate rather than the annual rate. Get a calculation of the full APR, including all interest, all fees, and all other charges, and reject the bill if it is over 36%.
  • Include anti-evasion provisions to prevent lenders from laundering their loans through out-of-state banks to evade state rate caps or disguising their loans as sales, wage payments, or other devices.

In addition, states should make sure that their loan laws address other potential abuses. States should:

  • Require lenders to evaluate the borrower’s ability to repay any credit that is extended.
  • Prohibit mechanisms, such as security interests in household goods and post-dated checks, that coerce repayment of unaffordable loans.
  • Require proportionate rebates of all up-front loan charges when loans are refinanced or paid off early.
  • Limit balloon payments, interest-only payments, and excessively long loan terms. An outer limit of 24 months for a loan of $1,000 or less and 12 months for a loan of $500 or less might be appropriate, with shorter terms for higher-rate loans.
  • Employ robust licensing and reporting requirements, including default and late payment rates, for lenders.
  • Include strong enforcement mechanisms, including making unlicensed or unlawful loans void and uncollectible and providing a private right of action with attorneys’ fees.
  • Tighten up other lending laws, including credit services organization laws, to prevent evasions.

See NCLC’s 2015 report on high-cost small loans and our Rent-a-Bank Lending and Fintech Credit pages for more details on these issues and recommendations.

In the absence of rate limits at the federal level, state interest and fee caps are the primary bulwark against predatory lending. By following these guidelines, states can ensure that their laws are effective at protecting consumers.

Authors and Acknowledgments

Co-authors: Carolyn Carter, deputy director, National Consumer Law Center; Lauren Saunders, associate director, National Consumer Law Center; Margot Saunders, senior counsel, National Consumer Law Center.

The authors thank NCLC colleagues Anna Kowanko, Andrew Pizor, Michael Best, Michelle Deakin, Stephen Rouzer, and Ella Halpine for assistance.

Related Resources

NCLC Digital Library

Consumer Credit Regulation
(see chapters 9 & 10)

NCLC Digital Library

Surviving Debt