In an effort to prevent consumers from ending up in payday-loan debt traps where they renew small loans over and over—paying more in fees over time than the original loan amount—Senate Democrats reintroduced legislation that would cap consumer loan interest rates at 36%. 

The bill, dubbed the Veterans and Consumers Fair Credit Act, builds on the Military Lending Act enacted in 2006, expanding the 36% interest rate cap to all consumer loans, including payday and installment loans. 

“Now is the time for this committee to again lead the country, by passing a federal law establishing a 36% interest rate cap on all consumer loans,” Sen. Sherrod Brown (D-Ohio) said in a hearing Thursday. 

Although the 36% rate cap would apply to most consumer credit products, Senate Democrats took aim at payday loans in particular during Wednesday’s hearing, calling them predatory.

In states where these small-dollar loans are available, consumers can start borrowing with simply an ID and bank account, no collateral needed. Yet experts say the short turnaround time to repay these loans can make them expensive and very difficult to pay off.

About 18 states and Washington, D.C., currently impose a 36% rate cap on payday-loan interest rates and fees, with Hawaii, Illinois, and Nebraska all recently putting restrictions in place, according to the Center for Responsible Lending. 

And while several major bank CEOs recently said they were open to a 36% rate cap, many within the financial industry spoke up Thursday to oppose the legislation. Some of those opposing the bill argued it would cut off consumers’ access to credit, particularly those of Black and low-income communities, because lenders simply can’t afford to lend at that rate. 

For a lender to break even on a small-dollar loan, it would need to charge 140% APR in certain cases, according to the Bank Policy Institute. The Institute also contended that APRs are a bad way to characterize the fees and charges associated with small loans. A $500 loan with a three-month term typically costs borrowers about $55 in interest and fees. The APR comes out to 44%. But if a lender charged $35 for a smaller, $100 loan taken out for the same time period, it amounts to a 140% APR. 

“This legislation would be a disaster for American consumers, especially those who use, demand, and depend on short-term, small-dollar credit products,” Andrew Duke, executive director of the O​​nline Lenders Alliance, said in a statement. In a recent survey, OLA found that 31% of all adults, including 50% of Black adults, have been denied credit when they needed it. 

Other opponents also questioned how effective the underlying Military Lending Act legislation really was, noting there’s not a ton of data on how it would play out among the general population. 

“The military is a small percentage of the population,” said Bill Himpler, CEO of the American Financial Services Association. Himpler urged the committee to offer data from the Department of the Defense on how the Military Lending Act is impacting service members and their families. 

“We cannot move from a small segment of the population without data to the entire financial services system—you’re playing with fire,” Himpler added. 

But there is evidence that a 36% rate cap could work, and some major banks have already adopted policies that comply. Bank of America, for instance, rolled out a small-dollar loan product called Balance Assist last fall. This program allows existing customers to borrow up to $500, in increments of $100, for a flat $5 fee. The APR on the product ranges from 5.99% to 29.76%, depending on the amount borrowed, and customers have three months to repay the loan in installments. 

U.S. Bank offers Simple Loan to checking customers, allowing them to borrow up to $1,000 for a three-month period, paying back the loan in monthly installments. A $400 loan under this program would incur a $48 fee, making the APR 70.65%.

Correction, August 5, 2021: A previous version of this article misstated the fees associated with U.S. Bank’s Simple Loan.