Those calling for a 36% rate cap on most forms of consumer credit here in New Mexico rarely, if ever, cite hard data supporting claims that a rate cap will help consumers. Theirs is a worthy goal: To provide greater financial security for all New Mexicans. I support this goal, as well, but a 36% rate cap is not the way to achieve it.
The fact is, a 36% 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 (https://www.experian.com/blogs/ask-experian/research/subprime-study/), 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% rate cap, essentially leaving them without safe and reliable access to credit.
Data has shown the 36% cap has failed in other states. In states with imposed interest-rate caps, there has been a demonstrable reduction in access to credit, affecting poverty levels and financial stability. In Georgia and North Carolina, which have imposed rate caps, people “bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 bankruptcy at a higher rate,” according to https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr309.pdf. Moreover, the North Carolina Commissioner of Banks Consumer Finance’s 2018 Annual Report found access to loans less than $1,000 (declined) because lenders were withdrawing from the market (https://www.nccob.gov/public/docs/news/pub%20and%20research/2018_annual_report_final.pdf). Additionally, the Federal Reserve found a 36% 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% 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 the 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%. Repaid in a month, the rate is 12%. Repaid one day after the loan was issued, the APR is 365%. 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 their economic security to harm.
