Changing bad habits of the past is seldom easy. That’s why seeing legislation capping annual interest rates for small loans make it out of the New Mexico Senate this week is encouraging.

Legislation to halt predatory lending has never made it this far.

With Senate Bill 66 now in the House of Representatives, the odds are good that New Mexicans in need of a quick loan between paychecks won’t be stuck with ridiculously high interest rates that make it difficult to pay back the principle.

Rates are still high — the legislation caps interest around 36 percent, down from 175 percent allowed now. A number of states and the District of Columbia cap interest rates around 36 percent — New Mexico will not be alone setting limits if the bill is signed into law.

What this legislation does is important — people who already are broke and need cash quickly can pay back loans without piling high interest and charges on top of the original amount. Such loans, while providing quick cash, can mire individuals deeper and deeper in debt.

Yet people of goodwill disagree on whether reducing the interest rate is the right thing to do, as a two-hour debate in the Senate earlier this week proved.

Some senators believe higher interest rates are the only way lenders will stay in the market — and that lowering rates, even to 36 percent, will cut off access to cash for people in great need.

They did not persuade the majority, with the legislation passing on a 25-14 vote Tuesday and moving to the House of Representatives. The governor has endorsed the measure.

Sen. William Soules, D-Las Cruces, a sponsor of the legislation, had it exactly right on the practice when he said: “Predatory loans hurt families and push people into poverty. They prey on people on the margins, and they weaken the foundation of strong communities and economies that they’re built upon.”

Alarm over the legislation making it harder to obtain loans for people who need small loans to tide them over is understandable but overblown. Lenders can make money charging 36 percent interest.

Already, the Military Lending Act limits the annual percentage rate for loans to no more than 36 percent for members of the military. That includes associated costs of the loan, such as fees. Those protections are important for other vulnerable consumers, and 36 percent allows a decent profit.

Lowering the rate to 36 percent has taken time — the 175 percent figure was approved under Gov. Susana Martinez and signed in 2017. That was a step forward and remains much better than states such as Texas, where interest rates for small loans can be as high as 600 percent.

Beyond limiting predatory lending, New Mexico needs to do more to encourage the financing of small loans to individuals from other sources than a storefront in a shopping center. Small loans could come from credit unions and community banks, with more reasonable fees, interest rates and fast turnaround times. People who need quick cash can’t wait days or weeks for approval.

Employers can set up the Earned Wage Access program or other apps that let workers access pay as they earn it, rather than waiting for the next paycheck or visiting a storefront lender. Establish savings programs, again through work, so employees can opt in. That way, putting money aside for a rainy day becomes a habit. Of course, low-wage workers can save more if they make more, but that’s a debate for another day.

For now, the Senate has done the right thing in passing legislation that protects the vulnerable from predatory lenders. We look forward to its approval in the House and Gov. Michelle Lujan Grisham signing this legislation into law.

(3) comments

Khal Spencer

There was a time when sky high borrowing rates were called usury, and only available through your friendly neighborhood loan shark. Its sad that these sorts of rates became legal.

Of course the bigger problem is income inequality coupled to high expectations, goading people into taking out usurious loans or hocking their motor vehicles, homes, family china, or firstborns.

So I think the root cause of this, and the root solution, is to somehow get back to the idea that jobs ought to pay enough to live on, and people have to live within their means. I'm in the middle of The Big Short, by Michael Lewis. He points out the corruption in the system, with investment companies encouraging risky home loans using rather curious financial instruments, and encouraging gullible people to borrow beyond their means, which they gladly did to enjoy the American Nightmare, er, I mean Dream. Its an awful mess.

Mike Johnson

Wow! Talk about just parroting the party line, 36% interest is now "reasonable"???? No, that is not even close to being reasonable.

Khal Spencer

I think the alternative is higher risk loan providers fleeing the state rather than offering lower rates for high risk customers. Capitalism at work, or, shall I say, rock, meet hard place.

Welcome to the discussion.

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