By Jason Stverak
Credit unions already operate under a statutory interest-rate cap that is far lower than what applies to banks and other lenders. For decades, federal credit unions have been generally limited to an interest rate of 15% (currently 18% under a temporary allowance) on loans – a policy reflecting the credit union mission of putting people over profits. This long-standing cap, combined with credit unions’ not-for-profit structure, ensures that credit unions strive to offer affordable credit to their member-owners.
In short, credit unions are already doing what policymakers say they want: keeping rates reasonable and prioritizing members’ financial well-being over maximizing returns. Imposing an even more extreme nationwide cap – such as the recently proposed 10% interest rate cap on consumer credit – may sound like a way to protect consumers, but it would in fact backfire and harm the very people it’s intended to help.
Unintended Consequences Of A 10% Cap
Well-intentioned as it may be, a rigid 10% annual percentage rate (APR) cap on credit (particularly on credit cards) would produce serious unintended consequences. The Defense Credit Union Council (DCUC) has a well-documented history of opposing blanket interest-rate caps for exactly this reason. Our concern is that an arbitrary cap would reduce access to credit, especially for higher-risk borrowers who rely on credit unions for fair, affordable loans. If credit unions are suddenly forbidden from charging above 10% APR, many would have no choice but to tighten their lending standards or even discontinue certain loan programs. As DCUC recently told Congress, a federally imposed 10% cap would “hinder credit unions’ ability to serve their members, forcing many to tighten lending criteria or discontinue credit card offerings altogether for higher-risk borrowers”, leaving vulnerable groups with fewer options and driving them toward predatory lenders.
Key impacts we foresee include:
- Reduced Credit Access for Underserved Communities: Credit unions that serve low-income and working-class populations would face greater challenges covering the risks and costs of making loans under such a low cap. These institutions might be forced to approve credit only for those with pristine credit histories, cutting off those who most need access to small loans or credit cards to bridge financial gaps. It’s well established that blunt government price controls like APR caps tend to hurt consumers in the long run, and in this case it would likely be the highest-risk borrowers – the very group the cap purports to help – who get hurt first.
- Cutbacks in Small-Dollar Loans and Credit Cards: Many credit unions offer small-dollar emergency loans and credit cards with reasonable limits to help members manage unexpected expenses or build credit. Under a strict 10% cap, these offerings could become unsustainable. The reality is that smaller loans still incur underwriting and servicing costs; a 10% ceiling may not even cover the basic cost and risk of making a $500 emergency loan, for example. Rather than make such loans at a loss, credit unions might have to stop offering them. Similarly, credit cards – which today average around 21% APR across all accounts in the U.S. – would effectively disappear for many consumers if rates were capped at 10%. Only the most creditworthy would qualify for a card under that cap, leaving millions of everyday Americans with no credit card access at all. As a coalition of community bankers and credit union groups warned, a 10% cap would “eliminate access to credit cards for millions of consumers” and push them into costlier, less regulated alternatives.
- Disproportionate Impact on Young Servicemembers: The consequences would be especially severe for young military servicemembers and junior enlisted personnel. These individuals are often just starting out in their financial lives and may not have high credit scores yet. Under a one-size-fits-all 10% cap, credit unions on bases might be unable to approve credit cards or small loans for many of these young men and women. That doesn’t eliminate the need for credit – it just means servicemembers facing a car repair or emergency travel will be forced to look elsewhere, often at much worse options. For example, U.S. Senator J.D. Vance, who served as a Marine, recounted in his memoir Hillbilly Elegy that as a young serviceman he nearly agreed to finance a car at a 21% interest rate from a dealer. A Marine mentor intervened and urged him to check with Navy Federal Credit Union – which offered him a rate “less than half” of that 21%. Vance admits he had no idea he could shop around for a better rate; he felt lucky just to get a loan approval. This story has a happy ending because a credit union was able to provide an affordable loan (around 10% or lower) to a borrower with a thin credit file. But if a blanket 10% cap had prevented the credit union from pricing that loan according to risk, would they have made the loan at all? A rigid cap could mean many young servicemembers in similar situations simply wouldn’t get a car loan or credit card in the first place – a major obstacle for those who need a vehicle to get to work or access to emergency funds between paychecks.
Pushing Borrowers Toward Predatory Lenders
Limiting the ability of mission-driven institutions like credit unions to price loans according to risk does not eliminate the need for credit; it simply pushes that need into other channels. Unfortunately, those other channels are often predatory. If a military family or lower-income household can’t get a 12% APR loan from their credit union due to a 10% legal cap, they may end up at the door of a payday lender or title loan shop charging 300% APR – or worse, an illicit loan shark operating outside the law. Even Vice President J.D. Vance has noted this danger from personal experience. With a poor credit history in his younger years, Vance has admitted he resorted to using a payday lender on at least one occasion to avoid a hefty bank overdraft fee. “Without a payday lender, he’d have been forced to go to a loan shark,” he observed of his situation – meaning the only alternative would have been an illegal lender that might threaten violence over repayment. While a 10% cap aims to stamp out high interest rates, it could inadvertently send vulnerable consumers into the arms of much more dangerous and expensive lenders outside the credit union system. We’ve seen this pattern before: when well-meaning laws severely restricted short-term loans in some jurisdictions, many borrowers didn’t simply stop borrowing – they turned to online and underground lenders, or even bounced more checks and paid overdraft fees, arguably ending up worse off.
Undermining The Credit Union Service Model
It’s important to recognize that credit union lending doesn’t happen in a vacuum. The modest interest income that credit unions earn on loans goes back into supporting a whole ecosystem of member service. Defense credit unions, in particular, provide far more than loans and deposit accounts to our military communities. They offer financial counseling, budget coaching, fraud protection programs, deployment-related assistance, and specially tailored relief programs for military families facing hardship. These services are often provided at little or no cost to members, funded in part by the credit union’s lending operations. If a one-size-fits-all 10% cap slashes credit unions’ ability to generate enough revenue to cover the higher risks of serving a military population (who move frequently, deploy overseas, or lack lengthy credit histories), it could undermine the sustainability of those crucial services. DCUC has emphasized that military families deserve policies that strengthen their financial security – not policies that unintentionally jeopardize it by choking off the trusted, affordable credit and support services that defense credit unions have long provided.
Moreover, unlike big for-profit lenders, credit unions cannot simply offset losses by charging new fees or raising capital from Wall Street. Their not-for-profit cooperative structure means if lending is severely constrained by an artificial cap, the whole range of member benefits – from lower fees to community education programs – will feel the squeeze. In essence, a strict interest cap could force credit unions to do less of what they do best: serving those who might otherwise be left behind.
Smarter Solutions To Protect Consumers
Rather than imposing a sweeping national interest rate cap, policymakers should pursue more targeted solutions that address the root causes of consumer financial strain without cutting off access to responsible credit. DCUC has urged lawmakers to consider alternatives such as:
- Expanding Financial Education and Counseling: Improving financial literacy and access to quality counseling can help consumers make informed borrowing decisions, avoid traps, and improve their credit profiles so they qualify for lower rates naturally. Many credit unions already lead on this front by providing free financial education to their members.
- Promoting Responsible Lending Models: Instead of arbitrary caps, encourage the growth of fair loan products (like credit builder loans, payday alternative loans, or lower-rate credit cards) that are designed to serve risky borrowers in a sustainable way. Credit unions have pioneered many of these programs under existing regulations and can do even more with supportive policies.
- Cracking Down on Predatory Actors: Direct regulatory attention and enforcement toward the truly exploitative lenders – the ones charging 300% APR or engaging in deceptive practices – rather than hamstringing the reputable institutions. Strengthening anti-predatory lending laws and closing loopholes (for example, ensuring payday lenders can’t evade state usury laws via online platforms) would target the real problem at its source.
By focusing on these approaches, Congress and regulators can help protect consumers from unfair practices while still preserving their ability to obtain credit on reasonable terms. We welcome the opportunity to work with lawmakers and the Administration on solutions that do not inadvertently penalize the institutions that have consistently put people first. Credit unions have proven that you can advance financial inclusion responsibly – our very structure and history are built on that premise. Let’s strengthen that capacity, not weaken it.
In summary, a blanket 10% interest rate cap, however well-intentioned, is the wrong tool for the job. It would likely restrict credit availability, hurt military families and working Americans, and drive many into worse financial straits outside the credit union sphere. America’s credit unions stand ready to continue serving those who need us most, as we have for generations. We urge policymakers to partner with us in that mission by pursuing smart protections that rein in abuses without cutting off access to trusted, affordable credit. The goal we all share is to bolster consumers’ financial security – and we can achieve that without imposing heavy-handed caps that do more harm than good.
Jason Stverak is Chief Advocacy Officer at the Defense Credit Union Council.