Summarize the following paragraphs in 3 to five sentences. Arkansas residents wi

Question

Summarize the following paragraphs in 3 to five sentences.

Arkansas residents willingly drive out of state to acquire installment loans that carry annual percentage rates (APRs) well in excess of 17 percent. On average, Arkansas residents pay an APR of 80 percent for loans, with an average loan size of $1,051. After adjusting for travel costs to obtain the loan from a neighboring state, Arkansas residents pay an average rate of about 93 percent. This finding is consistent with economic theory, which predicts that an interest rate cap would give rise to increased search costs.

Driving distance matters. The study’s findings suggest a decline in the loan usage rate as the relative distance to out-of-state installment lenders increases. For distances beyond 40 to 45 miles, loan usage is very low. This is consistent with the idea that consumers weigh the costs and benefits of driving out of state to obtain an installment loan.

Lower rates of installment loan usage in Arkansas compared to its bordering states suggests unmet installment loan demand in Arkansas, particularly in the interior counties. Overall, Arkansas residents hold installment loans at an average rate of 90.4 loans per 10,000 population, compared to 524.5 loans per 10,000 population in the border counties of states neighboring Arkansas. Residents of Arkansas’s interior counties held installment loans at a rate of only 5.5 loans per 10,000 population. This suggests unmet demand is also consistent with economic theory, which predicts an interest rate cap destroys gains from trade that would have occurred without a cap.

Explanation / Answer

According to the economic theory an interest rate caps give rise to increased search costs which is leading the residents of Arkansas to go to neighbouring states for aquiring loans. The loans that they aquire demand them to pay an APR of 80 percent of loans. But gradually with time, with increasing distance the loan usage rate declines as the residents start weighing the cost and benefits of travelling out of state. this leads to unmet loan demands in the state especially in the interior countries.

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