Gessing: High Interest Loans Have A Purpose

By PAUL J. GESSING
President
Rio Grande Foundation

Politicians often claim to be helping “the poor” with the policies they enact. But people with the resources to take extended time away from their work and spend months in committee hearings are inherently not “representative” of the people of New Mexico.

They need to be reminded that most people live “paycheck to paycheck” and struggle to manage an expense from time to time – more so than New Mexico’s 112 legislators and Governor.

People of means generally have equity in their homes or can access government-subsidized loans for college. They would not find loans with interest rates in excess of 36 percent to be attractive, but the reality is that most Americans (and an even higher proportion of New Mexicans) lack $400 in accessible savings. Whether facing a car breakdown or another unexpected expense, working people deserve access to quality credit regardless of income or credit history.

What alternatives do the 42% of consumers with non-prime credit scores have? If a borrower does not have collateral, their borrowing options are constrained as the risk of lending them money rises.

Passing a 36 percent interest rate cap in New Mexico amounts to the Legislature telling predominantly poor, working-class minorities they are incapable of making their own financial decisions. Who is to say whether it is better for a borrower to take out a regulated loan to meet a short-term need rather than suffering late payments that often result in fees equal to 100% of the bill amount, bounced checks, or other forms of lending that result in aggressive collections practices and can lead to the loss of homes or cars?

New Mexico has the third highest rate of car repossessions in the country. If a borrower falls behind on their payments a creditor may repossess their car at any time without their consent. A repossession can remain on a borrower’s credit score for at least 7 years, damaging their credit and making it even more challenging for them to access financial options down the road.

If small loans at lower interest rates were available without putting one’s car down as collateral, wouldn’t people in need of short-term cash be using those already?

Few banks offer personal loans and credit union loans designed for nonprime consumers, called “payday alternative loans,” represent less than 1% of the 100 million Americans who make up the non-prime consumer market.

Other lenders have claimed that they can fill the gap created by regulations like those being pushed in Senate Bill 66 this session – a claim which hasn’t proven true in other states. Most traditional lenders simply will not or cannot make these loans to borrowers with lower credit scores. In a letter to the US Department of the Treasury last September: “Small dollar loans can be challenging for CDFIs (traditional lenders) to make work under their business model. The loans take the same or more resources to underwrite, manage, and provide technical assistance for as larger loans with a much narrower margin. Additionally, losses and defaults for these types of loans can be much higher than typical loans.”

It’s easy to sit in your house with electricity and heat with a functioning car to take you to your place of work in the morning and pass judgement on people of lesser means who have been shut out by mainstream lenders. Given the events of the past year and the negative impact lockdowns have had, especially on low-wage workers, it would seem that the Legislature should have higher priorities than eliminating needed financial options for working people.

The Legislature should refrain from further restricting the ability of New Mexicans from accessing credit of their choosing when emergencies arise and pushing them to worse outcomes.

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