Question

First State Bank offers to lend money to Todd at 15 percent interest. Before Todd accepts, a statute is enacted prohibiting loans at interest rates greater than 12 percent. Todd and the bank

a) Must proceed with the original terms
b) Can renegotiate the interest rate
c) Are bound by the new statute
d) Cannot enter into the loan agreement

Answer 1

The impact of a usury law that caps interest rates at 35% would likely cause a decrease in the number of loans with higher rates, while it would have minimal effect on loans with lower rates. Interest rates would not exceed the cap, protecting consumers from high rates. The actual effect of the law depends on whether the cap is above or below market interest rates.

Step-by-step explanation:

If a usury law limits interest rates to no more than 35%, the anticipated impact on the amount of loans made would be a potential decrease for loans that would otherwise carry rates higher than this cap. Conversely, for loans that usually have interest rates lower than the cap, the usury law could have little effect. On the other hand, the interest rates paid would likely not increase past the 35% threshold due to this law, potentially protecting consumers from excessively high rates.

It's worth noting that according to Libre Texts™, if a usury law sets a price ceiling for interest rates above the market interest rate, it becomes nonbinding and thus has no practical effect unless market forces cause the equilibrium price to exceed this ceiling. Therefore, if interest rates are generally below 35%, this kind of usury law would not alter the current market dynamics significantly, as the market rates would continue to fluctuate below the set maximum.