Usury laws are intended to prevent creditors from charging predatory interest rates. While morally pleasing, their practical effects are debatable, since borrowers whose credit profiles would call for ultra-high interest rates might not have access to credit at all in the presence of such laws.
But do they even work? A beautiful new paper by Brian Melzer and Aaron Schroeder says they do not, if sellers are allowed to offer loans directly:
We study the effects of usury limits on the market for auto loans and find little evidence of credit rationing. We show instead that loan contracting and the organization of the loan market adjust to facilitate loans to risky borrowers. When usury restrictions bind, auto dealers finance their customers’ purchases and raise the vehicle sales price (and loan amount) relative to the value of the underlying collateral. By doing so, they arrange loans with similar monthly payments and compensate for credit risk through the mark-up on the product sale rather than the loan interest rate.
Unless we are willing to ban auto dealers from offering loans – which I suspect would be difficult – then usury protection effectively does not exist in the auto loan market, even though usury is banned by law.
This is an example of why economics is such a compelling subject: even seemingly straightforward solutions to simple problems may completely fail to work. Human beings are extremely clever and complex animals, and it is quite tough to design systems to shape their behavior in the way we want to.