TAILIEUCHUNG - Controlling Interest: Are Ceilings On Interest Rates a Good Idea?

Usury laws establish a legal maximum interest rate (or price) that lenders may charge for a loan or extension of credit. These laws are, in effect, a form of price control. When a usury law is introduced, it may have no impact on the credit market or it may alter the way in which price and quantity are determined. Exactly what happens depends on where the usury ceiling is relative to the market rate. When the legal ceiling is above the market rate of interest, the law has no effect at all. The market forces of supply and demand are not bound by the usury. | Source http consumer_information Controlling Interest Are Ceilings On Interest Rates a Good Idea Do ceilings always result in lower rates Can ceilings reduce the amount of available credit Do some borrowers tend to benefit from ceilings more than others No one wants to pay more interest than is necessary when they use credit. Whether shopping for mortgages business loans or auto loans we usually are concerned about rates and terms and want to make sure we do not pay too much for the use of someone else s money. Just as in any other purchase when we buy credit we want to pay the lowest price possible. In the past the government often tried to ensure that we pay a fair rate of interest by implementing usury ceilings or limits on the rates that lenders can charge. During the 1980s there was a general trend toward eliminating or raising these limits as policy-makers reacted to the high inflation and record interest rates of the late 1970s. During the early 1990s however the trend reversed as some suggested that caps should be placed on credit card rates which remained at historically high levels while other key interest rates declined significantly. On the surface capping interest rates seems to be perfectly logical. To protect people from paying interest rates that are perceived as too high the government can simply mandate that rates be kept below a certain level. However interest rate ceilings can have unintended consequences. This essay examines these possible consequences by discussing the economic theory behind the arguments for and against usury ceilings. Just Another Market Laws designed to prevent usury or the taking of excessive interest have long been the subject of controversy. While advocates of usury ceilings claim that such controls protect consumers from abusive lending practices and enable them to obtain loans at reasonable rates their critics argue that they work to consumers disadvantage by restricting .

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