LEWIS MANDELL Consumer Knowledge and Under- standing of Consumer Credit

Much has recently been written about the desirability of restric-tive usury laws. While low maximum rates may prevent excessive charges to some, they also limit the ability of high-risk persons to borrow. Therefore, if consumers have a sufficient understand-ing of the credit market to realize what they are paying for and how much they are paying when they borrow, a case can be made against low maximum finance rates. This article reports on a nationwide study designed to measure consumer knowledge and understanding of consumer credit. The results are that while consumers can generally rank lenders cor-rectly in terms of cost, there are serious gape in their knowledge of the credit market. Education and income are the key determi-nants of knowledge and understanding of consumer credit. Much of the recent attention which has been paid to consumer credit has focused around the maximum allowable rates of interest on con-sumer loans. Legislation in several states has recently lowered allowable rate ceilings on consumer credit substantially, a few to as little as 10 percent. Opposing these restrictions on interest rates, aside from the lenders whose vested interests are hurt by such restrictions, are many econo-mists who argue as Paul Samuelson does, that “setting too low ceilings on small loan interest rates will result in drying up legitimate funds to the poor who need it most and will send them into the hands of illegal loan sharks. History is repleat with cases where loan sharks have lobbied in legislatures for unrealistic maximum rates knowing that such meaningless ceilings would permit them to charge much higher rates ” [ I 01 Implicit in the arguments of economists opposing restrictions on maximum interest rates are several assumptions that are so basically imbedded within the structure of microeconomic theory that they are seldom explicitly considered. Two in particular, however, appear worthy of some explicit consideration. The first underlying assumption is that the consumer who contracts for installment debt actually delib