Too low a ceiling eliminates access to necessary loans
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 36% rate cap is not the way to achieve it.
The point is that a cap rate of 36% 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 car payments, fuel and medical expenses. I saw him every day in the service of 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, which means that they would likely not qualify for a small loan below a 36% cap rate, leaving them essentially without secure and reliable access to credit.
Data showed that the 36% cap failed in other states. In states that have 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 top rates, people “rejected more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy at a higher rate.” according to https://www.newyorkfed.org /medialibrary/media/research/staff_reports/sr309.pdf. Additionally, the North Carolina Banks Commissioner for Consumer Finance 2018 Annual Report found access to loans under $ 1,000 (denial) because lenders were pulling out of the market (https: // www .nccob.gov / public / docs / news / pub% 20and% 20research / 2018_annual_report_final.pdf). Further, the Federal Reserve has discovered 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%. 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 endanger their economic security.