Kerpen: Bernie Sanders’, AOC’s and Hawley’s trap to destroy consumer credit

Bernie Sanders and Alexandria Ocasio-Cortez are at it again, hawking their “Loan Shark Prevention Act” with a shiny new 10% APR cap. Worse, they each have a Republican joined up — Josh Hawley of Missouri in the Senate and Anna Paulina Luna of Florida in the House.

This quartet is pitching their proposal as a lifeline for the little guy — protection from greedy bankers and payday vultures. It’s really a sledgehammer to destroy private credit, a backdoor to government dependency, and a betrayal of the very people it claims to save.

Conservatives need to wake up before they accidentally cheerlead this disaster.

Suppose you could get a $1,000 loan for a month that would cost you $10. That’s an amazing bargain at 1% interest. But annualize that to APR and suddenly it’s above Bernie and AOC’s magic 10% line. Their bill effectively bans any monthly interest north of 0.8%. If a circumstance arises outside of your control and you need a short-term loan, there may be no legal options left. Just like that, “loan shark prevention” becomes “loan shark promotion”.

If all interest rates are annualized and capped at 10%, legitimate lenders stampede out the door. Why lend to anyone with a scratch on their credit when the return is gutted? It’s way too easy to end up losing money when defaults rise. Many would-be borrowers — single moms, gig workers, the working poor — get nada.

Studies bear this out. After South Dakota’s 36% cap, small-dollar loans vanished, shoving folks to loan sharks charging 100% or more. At 10%, it’s worse. Credit cards? Gone. Private lending? Toast.

The obsession with annualized interest rates creates more confusion than clarity. It’s not even consistently applied. Payday loans using a linearized APR under the Truth in Lending Act calculated by dividing the finance charge by the loan amount and multiplying it by 365 divided by the number of days in the loan term. This formula turns a $15 fee on a two-week $100 payday loan into a 390% horror show. Calculated like credit card APRs, with daily compounding over a year, that same loan would have an APR over 4,000%. But it’s still just $15.

It’s the annualized abstractions that spook people. Sanders and AOC wield them like a club, knowing big numbers trigger outrage.

Some religious conservatives hear “usury” and picture Ezekiel 18:8’s righteous man shunning interest. But the Bible’s concern is exploitation — crushing widows with debt traps — not a modest fee for a loan that keeps the lights on. This 10% annualized interest cap isn’t biblical justice; it’s a distortion of it.

There is a conservative ideal of everyone living with their means. But circumstances of life often make that impossible. Recent survey data shows that as many as two-thirds of Americans generally live paycheck-to-paycheck, and most use credit cards to fill in the gaps.

Any conservative tempted to join Bernie and AOC should be clear-eyed about the endgame: their bill kills private lending — and that’s the point.

Their real play is postal banking: turn the post office into a state-run credit mill, dishing out ultra-low-interest loans with taxpayers backstopping losses. Step two? Forgive it all come election time. Biden’s already erased $160 billion in student debt; now imagine that for every car loan and cash advance. It’s not compassion — it’s a vote-buying machine, funded by you. Centralize credit under Uncle Sam, kill off banks and credit unions, and wave goodbye to market choice.

The Republican cosponsors are handing Sanders and AOC the rope to hang free markets. Yes, credit card rates can sting, but they are voluntary and, when used responsibly, short-term. They can provide a lifeline for the borrowers banks wouldn’t touch otherwise.

Kill the 10% cap before it kills credit. If we don’t stop it, we’re headed towards post office loan windows and a forgiveness circus every four years.

Phil Kerpen is the president of American Commitment and the author of “Democracy Denied”. Kerpen can be reached at phil@americancommitment.org.