The 2016 Legislature convenes Jan. 19, 2016, giving lawmakers over eight months to come up with a new approach to reforming the high-risk lending business, often called payday loans, so the result protects low-income consumers and preserves their options.
In prior sessions, proposals to cap annual percentage rates have failed. And while the Journal has supported those to protect vulnerable borrowers, focusing solely on APR generally makes the lending business unfeasible and does not give clarity to the fiscally unsophisticated.
So rather than cap APR at 36 percent, which, for example, would cost a borrower $3 a month on a $100 loan over a year (and make operating a storefront unsustainable, not to mention encourage a business to push innumerable rollovers and tack on exorbitant costs and fees), lawmakers would do better to either: Compute the cost of a loan (a challenging transparency task factoring payroll, capital costs, defaults, volume, etc.) or cap total payback instead.
Because what we are talking about is a way to preserve some access to credit for a segment of consumers with few options while addressing the horror stories – the $100 loan with a total finance charge of $1,000, the $200 loan with a total finance charge of $2,160 (both N.M. cases).
Requiring someone with limited financial savvy to mentally amortize a loan over time and factor in all possible fees and costs is as unfair as charging 1,000 percent interest rates. Wouldn’t it be better to let consumers know up front the worst-case scenario so they can make an informed decision on whether to get the loan from a storefront? Or not?
This editorial first appeared in the Albuquerque Journal. It was written by members of the editorial board and is unsigned as it represents the opinion of the newspaper rather than the writers.