Those calling for a 36 percent rate cap on most forms of consumer credit here in New Mexico rarely, if ever, cite hard data supporting claims a rate cap will help consumers. Theirs is a worthy goal: Provide greater financial security for all New Mexicans. I support this goal as well, but a 36 percent rate cap is not the way to achieve it.
The fact is, a 36 percent rate cap would be bad for New Mexicans — especially for lower-income households with little or no credit who are more likely to use small-dollar credit for everyday needs, including car payments, fuel and medical costs. I saw it every day serving my district. According to Experian, more than a third of all New Mexico consumers have subprime credit scores, meaning they most likely would not qualify for a small-dollar loan under a state 36 percent rate cap. That essentially would leave them without safe and reliable access to credit.
The 36 percent cap has failed in other states, data shows. In states with imposed interest rate caps, there has been a demonstrable reduction in access to credit, affecting poverty levels and financial stability.
According to the New York Fed, in Georgia and North Carolina, people “bounced more checks, complained more about lenders and debt collectors and have filed for Chapter 7 bankruptcy at a higher rate” after the states imposed rate caps.
Moreover, the North Carolina commissioner of banks found access to loans less than $1,000 declined because lenders were withdrawing from the market. Additionally, the Federal Reserve found that a 36 percent rate cap is unworkable for reputable lending institutions and harms the very people these caps were intended to protect.
So why, given what we know, do some in New Mexico continue to focus on a 36 percent cap as a solution? In part, because they don’t understand how interest rates work. For loans under $2,000, loan affordability is best judged by its length and monthly amount owed, not interest rate. Rates are a function of time, rather than a measure of the cost of a loan. Consider a consumer who borrows $100 today and is charged one dollar in interest. If repaid in one year, the APR is 1 percent. Repaid in a month, the rate is 12 percent. Repaid one day after the loan was issued, the APR is 365 percent.
It’s the same dollar in interest, vastly different APRs. Consumers must be protected from bad actors, but not with policies that fail to account for their legitimate need for access to credit and exposing harm to their economic security.
Lastly, there has been chatter of late that New Mexico’s credit unions are going to come to the table this next round and offer New Mexicans small-dollar loans at rates below 175 percent. I, and my former constituents, have heard this drumbeat before only to see similar proposals fall by the wayside. I would applaud their efforts if they came to fruition; unfortunately, folks in and around my district have been disappointed before.
A competitive market for consumers seeking small-dollar loans is a good thing. So, we should welcome credit unions to help consumers, but we shouldn’t do so in a way that puts their competition — installment lenders that have served consumers responsibly for decades — out of business.