Those calling for a 36% rate cap on most forms of consumer credit here in New Mexico rarely, if ever, cite hard data to support claims that a rate cap will help consumers. Their goal is laudable: to provide greater financial security to all New Mexicans. I also support this goal, but a cap rate of 36% is not the way to achieve it.
The point is that a 36% rate cap would be bad for New Mexicans – especially for low-income households with little or no credit who are more likely to use small credit for daily needs, including including car payments, fuel and medical bills. I saw him every day in the service of my district. According to Experian, more than a third of all New Mexico consumers have subprime credit scores, which means they probably wouldn’t qualify for a loan for an amount below a rate cap of 36. %. This would essentially leave them without safe and reliable access to credit.
The 36% cap has failed in other states, the 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 “rejected more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy at a higher rate” after that states have imposed rate caps.
In addition, the North Carolina Banking Commissioner found that access to loans under $ 1,000 declined because lenders were withdrawing from the market. Additionally, the Federal Reserve has found that a 36% rate cap is not applicable to reputable lending institutions and hurts the very people those caps were meant to protect.
So why, given what we know, do some in New Mexico continue to focus on a 36% cap as a solution? Partly because they don’t understand how interest rates work. For loans under $ 2,000, the affordability of the loan is best judged by its duration and the monthly amount owed, not by the interest rate. Rates are a function of time rather than a measure of the cost of a loan. Take the example of a consumer who borrows $ 100 today and pays $ 1 in interest. In case of repayment in one year, the APR is 1%. Repaid in one month, the rate is 12%. Repaid one day after issuance of the loan, the APR is 365 percent.
It’s the same dollar interest, very different APRs. Consumers must be protected from bad actors, but not with policies that ignore their legitimate need for access to credit and undermine their economic security.
Finally, there have been rumors lately that New Mexico credit unions are going to come to the table this next round and offer small dollar loans to New Mexicans at rates below 175 percent. My former constituents and I have heard that drumbeat before before we saw similar proposals go down the drain. I would applaud their efforts if they bore fruit; Unfortunately, people in and around my district have already been disappointed.
A competitive market for consumers looking for low loan amounts is a good thing. So we should welcome credit unions to help consumers, but we shouldn’t do it in a way that puts their competition – the installment lenders who have served consumers responsibly for decades – out of business.
Richard Martinez d’Española is the former chairman of the State Senate Finance Committee.