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Interest Rate Ceiling is "the maximum interest rate that a financial institution can charge a borrower for an adjustable rate mortgage or loan according to the contractual terms of the mortgage or loan."

According to this research paper interest rate cap seems to generate more negative effects that positive ones:

Regarding the effects of these caps, the evidence points to more negative effects, such as a withdrawal of financial institutions from the poor or from specific segments of the market (as in WAEMU countries and Nicaragua), an increase in illegal lending (for example, in Japan and the United States), a decrease in the licensing of new lending institutions (as in Bolivia), an increase in the total cost of the loan through additional fees and commissions (as in Armenia, Nicaragua, and South Africa), and a decrease in product diversity (as in France and Germany).

Out of curiosity, I have checked the APR for loans provided by a company that also operates in my country and it is about 300% for a maximum amount over the maximum time span (maximum amount should minimize fixed commissions influence, the currency is a stable one).

APR computed by some site for a personal loan with the worst credit score is about 30%.

So, the difference is very large and it would make sense to have interest rates caps, to avoid such discrepancies.

However, the aforementioned paper concludes that these caps have more negative effects that positive ones:

Question: Why are there so many (at least 76 countries) countries that apply interest rate caps/ceilings?

Alexei
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    Not your question but “decrease in product diversity” sounds like a BS negative effects invented from someone who is trying very hard to make a point. Basically, it says that banning some products is bad because it bans some products. But that's the point! – Relaxed Oct 25 '17 at 13:26
  • @Relaxed - yes, I agree. However, it is the best reference I could find to support my question. Personally, I think that these caps make sense to protect those customers that do not understand how much they really pay back, but this is just one aspect of the problem and more, only an opinion/feeling. – Alexei Oct 25 '17 at 13:32
  • Note that Germany AFAIK does not have a interest rate ceiling in the sense of the linked investopedia definition (loans > x% interest are forbidden), but instead if the deal is considered ursury (≈ lender deliberately using a known weakness, e.g. emergency of the borrower in order to impose conditions that are clearly outside the rational value of the credit) IIRC that voids the deal (lender has to pay back the credit, but no interest/fees). Adequate compensation for high-risk loans is allowed. Inadequate is e.g. > 2 * market interest rate or market interest + 12% (of credit). – cbeleites unhappy with SX Oct 26 '17 at 11:33

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There is a lot to speculate about Interest Rates Cap. The biggest issue with the concept is not that if it should exist or not but how often should be reformed, and how localized.

The historical argument supporting Interest Rates Cap (IRC) is usury. It's a very real problem even today. Notice that the paper you quote is not fully dismissing IRC but prompts governments to adresse its caveats.

However, if caps are still considered a useful policy tool for reducing interest rates on loans and increasing access to finance, they should be implemented in accord with our caveats.

It also seems to mention some informations that are not cited and some others that I would argue are not up to date. You see just a bit after this paper was released the UK has added new rules for the cap system.

“We created a powerful new consumer regulator to regulate the payday lending industry and legislated to require the FCA to introduce a cap on the cost of payday loans. This is all part of our long-term economic plan to have a banking system that works for hard-working people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with.” by George Osborne

Previous studies had already shown the IRC is particularly nocive to MFIs (Monetary Financial Institutions) (as opposed to smaller and larger banks, Figure 2):

That basic interest rate caps are most likely to bite at the lower end of the market is intuitive; interest rates charged by microfinance institutions are generally higher than those charged by banks6 and this is driven by a higher cost of funds and higher relative overheads. Transaction costs make larger loans relatively more cost effective for the financial institution.

These are institutions that usually make smaller loans with bigger rates (securities, credit cards, etc.). By adding new regulation rules the UK expected to control some of its bad household debt. As of today its a bit unclear if it worked or not (there are outstanding circumstances to UK, Brexit included).

Conclusion: In any case IRC is not a notion that will likely disappear. It tends to be reformed or implemented whenever a new crisis appears. And it tends to be further deregulated when things are going well. Currently many countries apply IRC because there is a real urgency in controlling debt. This includes household debt. Each small debt loan that needs to go to court has a cost for the state. And even more relevant, if left unchecked, it can lead to serious societal problems (too many indebted people will decrease purchase power).

armatita
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Normally, interest rate ceilings are part of the more general laws against usury. It's just the USA has had problems in implementing them.

Usury has been considered a crime, and even a sin in all the main religions of the world (hinduism, buddhism, judaism, christianism and islam), which is the reason there is still considered something to ban or avoid even in our neo-liberal capitalistic world of today.

Rekesoft
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  • Are there such laws in Eastern non-Abrahamic-religion countries? If not, then this answer is a random guess that is 100% clearly wrong. – user4012 Oct 26 '17 at 12:38
  • The part about usury being a sin in christianism, judaism and islam is just cultural background. There are religions which have no concept of "sin", and it doesn't mean everything is legal there. In any case, at least in the western world interest caps evolved from older laws against usury. In islamic countries any kind of interest is forbidden, so they don't need "ceilings" - the ceiling is zero. If the OP wants it, Ican look wether laws exist in hinduist/budhist/whatever countries and where they came from, but I think an answer that covers the western world is enough. – Rekesoft Oct 26 '17 at 13:08
  • I meant non-Abrahamic countries. China. India. Japan. South-East Asia except muslim majority ones there. The point is that you assert that the caps are due to Abrahamic usury rules. If that's the case, the caps should only exist in Abrahamic countries. – user4012 Oct 26 '17 at 13:50
  • @user4012 That's a non-sequitur. It's entirely possible that these rules to have a separate historical origin elsewhere or that they influenced other cultures. – Relaxed Oct 26 '17 at 22:04
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    @Relaxed - if they have separate historical origin, they can't be claimed to be caused by usury rules in Old Testament. That's my point. – user4012 Oct 27 '17 at 02:59
  • @user4012 And that point makes no sense. It's entirely possible for similar things to have arisen independently, to be caused by something in one culture and by something else in another one. It's even quite common. – Relaxed Oct 27 '17 at 08:13
  • @user4012 And you also ignored the other possibility alluded to in my comment, that it stemmed from Judeo-Christian beliefs and was taken over later on through some form of acculturation. This is also quite common (for a trivial example, consider the calendar) and is in itself enough to invalidate your point. I am not saying it's the case here, mind you, but reasoning like “if it's found in China, it can't be this or it can be that” is just so simplistic that it is useless. – Relaxed Oct 27 '17 at 08:21
  • @Relaxed As a side note, even if its religious origins were never an issue for me (this "religious" rulings are actually common law issues who were put in the God's mouth by priests to give them some sort of authority at a time were written law codes hadn't been invented yet, or even writing didn't exist), I've noticed that the wikipedia page on usury states that the five big religions have rulings against it. – Rekesoft Oct 27 '17 at 09:05
  • @Relaxed - that's easy to test for. See when the law started in the country. If it was prior to Western dominance, not due to that. If after, plausible that it may be. – user4012 Oct 27 '17 at 12:45
  • @user4012 That would be one consideration, yes, but that does not make your initial objection any less of a non-sequitur. – Relaxed Oct 27 '17 at 12:50
  • @Relaxed - causations need to be proven. Not just stated as a guess. – user4012 Oct 27 '17 at 13:07
  • @user4012 Causations… and everything else. But we have never demanded Wikipedia-style sources for each and every answer, that's the way this site works and this answer is a bog-standard answer from that perspective. It could do with more details but doesn't include anything unusual or extraordinary. It is in fact much more reasonable than most of your own answers, including the one you posted to this question, which does not offer much evidence of anything either. – Relaxed Oct 27 '17 at 15:04
  • My issue with your comment is that you haven't asked for more details or references. You claimed to positively show it was logically inconsistent using a non-sequitur and hypotheticals. The way I see it, even if @Rekesoft could satisfy your demand and positively state that there is no such prohibition in Eastern cultures, it wouldn't show much and would not improve the answer. And as I explained, even if such a prohibition does in fact exist, it would not prove this answer wrong. It's just irrelevant, no matter what. – Relaxed Oct 27 '17 at 15:04
  • @Relaxed - true, but when the question is "why" and the asnwer states "because", at least SOME amount of reference proving that it is indeed correct is needed. Otherwise, I can just answer "because aliens" with equal validity. – user4012 Oct 27 '17 at 15:15
  • @user4012 Nope, that's also a non-sequitur (but a brand new one). Whatever the question, you should only answer if you have reasons to believe the answer you provide is generally thought to be the right one, e.g. if all experts agree on that. It's better if you go to the trouble of helping the reader verify that and get more info by pointing explicitly to the relevant literature but omitting to do so does not make such a correct answer “equally valid” with any other (wrong) answer, let alone a blatantly silly one. – Relaxed Oct 27 '17 at 16:45
  • The answer we are commenting is not blatantly silly and you haven't shown it to be wrong. As I have said before, asking for more details is reasonable but the rest of your comments aren't. – Relaxed Oct 27 '17 at 16:47
  • @Relaxed - I don't actually think it's silly. However, it isn't either right or wrong by virtue of not being backed up. It's just a theory. – user4012 Oct 27 '17 at 20:29
  • @user4012 No, it's not, that's what I just explained. If I state the law of gravity, the landing on the moon, the results of the last US election or some other well established fact or scientific theory, they wouldn't become “random guesses” merely because I haven't gone to the trouble of explicitly describing the evidence buttressing it. – Relaxed Oct 27 '17 at 23:20
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There are several reasons for that:

  1. The general concept of "concentrated benefits and dispersed costs".

    The costs of lack of caps are very diffuse (many of the downsides of the caps as listed in your question apply to a large amount of people in small ways). The benefits of caps are rather concentrated - namely, to politicians (see #2 below) that get electoral support by "standing up for poor people"; and large lenders that eliminate niche competition from loan sharks.

    Additionally, the costs aren't just dispersed, they are rather invisible and intangible for most people. It's not like someone will Germany will go "Oh, I really want that weird loan. Oh, can't get it - let me blame politicians who voted for caps". Most people don't read specialized finance research which explains the downsides and costs of caps.

    And the benefits of not having the caps are also hidden among the poor population - someone poor who couldn't afford a shark loan at 300% before, now can't get a 20% loan either due to lacking good credit. No loan either way. So they don't really see much difference, despite being the primary theoretical beneficiary of eliminating caps according to your research. And someone who was going to get a legal 300% shark loan before, now will get an illegal one, without realizing that they will be paying even worse interest due to the loan being illegal.

  2. There's a strong bias in modern social democratic politics to "protect people from themselves".

    Thus, instead of "well, people know what they are doing, if 300% APR is not worth it for you, you won't borrow at 300% APR" attitude, it becomes "you don't know that 300% APR is bad for you, so we need to protect you from inadvertently making a mistake of borrowing at that APR".

    Whether such attitude is correct or not largely depends on one's ideology; one can make cogent arguments both ways (on one hand, we know that people are not as smart as they think they are - see all the behavioral economics research. Nobody is Homo Economicus. On the other hand, we know that wisdom of the crowds does work; and central planning nearly always sucks compared to just letting people do their thing, as evidenced by economic results of socialist vs. capitalist economies).

    Additinally, we know from past examples that most political leaders mostly vote for whatever benefits their elections or their ideological views, without regard to larger-picture economic consequences of the laws they pass. Oh, and being people too, they also share that same "aren't as smart as they think they are" issue.

user4012
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