GRADUATED INTEREST RATE CEILINGS AND OPERATING COSTS BY SIZE OF SMALL CONSUMER CASH LOANS

Abstract

interest that lenders may charge. These ceilings usually are expressed as a rate per dollar, regardless of the amount borrowed. With the advent of consumer demand for small loans in the late 1800's and early 1900's, it became clear that the costs of making and servicing small loans was higher than the revenue that was allowed by the usury rate (generally six percent). Consequently, small loans were available to consumers only from fraternal or charitable organizations or from illegal lenders (loan sharks). In 1916, the Uniform Small Loan Law was drafted to remedy this situation. It established an exception to the usury statute by permitting a 3? percent rate per month for loans under $300. The law subsequently was adopted and modified by many states. By 1935, it was recognized that lenders' costs varied inversely with the size of loan: as a consequence, lenders preferred larger loans and would not make small ones. Thus the Sixth (1935) Draft of the law included a provision for