Imagine taking out $200 for a short-term loan but paying back $2160.40 in interest and finance charges. No one with access to a bank or credit card would consider such a bad deal, but for hundreds of New Mexicans, a loan of this type might be their only option when they’re short on cash.
Some state lawmakers have tried during the current session to stop payday lenders from exploiting New Mexicans by floating legislation requiring a 36 percent cap on interest rates and fees. But those measures are most likely dead for the year.
In New Mexico, individuals who borrow money from payday lenders often take out a short-term payday loan for a relatively small amount of money (several hundred dollars) to tide them over until their next payday. Yet, the average cost of fees and interest rates are over 300 percent and consequently exceed the amount of the original loan by an extortionate amount. When repayment time comes, borrowers are encouraged to renew or “rollover” their loans—essentially taking out a new loan to pay off the original loan. According to one report by the Consumer Financial Protection Bureau, four out of five borrowers renew their loans within fourteen days of taking the original loan. The new loan comes with new fees and the amount owed quickly grows beyond what the borrower could ever repay.
What makes payday lending an especially abusive practice is the fact that these lenders prey on individuals in lower income brackets, and this traps them in a vicious cycle of debt. According to the New Mexico Fair Lending Coalition, single mothers, low-income families, veterans, and people of color are most likely to use payday lenders.
For many low-income borrowers, taking out a payday loan often seems like a plausible solution when they’re short on cash and need to pay their living expenses. According to one report, individuals are more likely to borrow money from payday lenders to pay for everyday living expenses than for unexpected expenses and emergencies. Those who borrow from a payday lender are less likely to have a bank account or able to borrow from a bank, so a payday loan might be their only option.
Payday loans are not only harmful for individuals, but they are also harmful for the economy. According to one independent study, for every dollar spent on costly payday loans, the economy loses $.24 because borrowers lose purchasing power as a result of these loans. This means less money is spent in New Mexico’s economy. What’s more, five out of six payday lenders in New Mexico are owned by out-of-state corporations, so the loan money—including fees and interest—are removed from the state and its economy.
Legislation to end these abuses has been enacted in the past, but payday lenders simply modify their loans to get around them—changing their payday loans to “installment” loans, for example. The only real solution is to cap interest rates and fees on all loan products. Twenty states have already capped interest rates between 17 percent and 36 percent and the federal government has capped rates at 36 percent for active military members.
The 36 percent cap is a much-needed provision that will prevent people who are already struggling financially from experiencing even more financial difficulties. The sad reality is that these predatory lenders prey on those who can least afford it. Once borrowers are lured in, they are easily trapped in an endless cycle of growing debt by rollovers and renewals. These lenders’ practices are harmful not only to individuals, but also to the economy. That makes it everyone’s business to ensure that these safeguards are put in place.
Savanna Shay Duran is a senior at the University of New Mexico and an intern at New Mexico Voices for Children.