Somewhere in New Mexico last year, somebody was on the hook for an installment loan with an interest rate of 1,679 percent.
But starting Jan. 1, state law will cap interest rates on small loans. The move follows a yearslong campaign by consumer advocates who have decried what they call predatory business practices for sending many New Mexicans spiraling into debt over loans for just a few hundred dollars.
The 175 percent cap is still far higher than the 36 percent limit consumer advocates have long sought. But they argue it could save New Mexicans $500 million over the next two years.
Small lenders have proliferated throughout the state in storefronts offering fast money and high interest rates. In a state with one of the highest rates of poverty in the country, the businesses have a market, touting themselves as providing financial services to people not served by traditional financial institutions like banks and credit unions.
But consumer advocates have accused small lenders of preying on the poor.
“We called this progress, not victory,” said Ona Porter, president and CEO of Prosperity Works, a consumer advocacy and financial literacy group based in Albuquerque.
The new law requires that lenders allow for repayment in at least four installments rather than just one payment, totally changing what are known as title and payday loans.
And Porter said the law will apply the same rules to various types of loans that have been regulated differently in the past.
Lenders will have to provide more data about the loans they are providing, too.
The cap will not be retroactive, only applying to loans made in 2018 and beyond.
Porter said the law is already having an effect. One year ago, the state licensed about 670 small loan businesses. Since then, she said, her group has seen more than 50 locations close down or prepare to close down by the end of the month.
About 12,850 people took out payday loans in New Mexico in 2016. Adding up the money from interest rates that are above the new limit as well as fees, the group believes the 175 percent cap will save New Mexico consumers a half-billion dollars over the next two years.
But neither Porter nor anyone else seems to believe the law will settle debate over small loans.
In a report earlier this year, the National Consumer Law Center said the new statute “might be considered an improvement but will still allow high-cost predatory lending to flourish.”
The group said that having some sort of cap is better than having no cap at all. But the organization also warns loans at 175 percent interest can still balloon rapidly.
A $5,000, four-year loan at 175 percent interest would leave the borrower with payments of $730 a month and over $30,000 in interest, the group said.
Porter said consumer advocates will renew their push to crack down on the industry in the 2019 legislative session, equipped with new data from the latest law.
In the meantime, the state has yet to come up with regulations to clarify parts of the law that take effect Monday.
Whatever the case, the new law will not change the fact New Mexico has a relatively large proportion of people without access to the traditional financial system.
“If you want [small loan companies] to go away — and I’m not opposed to that — we have to offer some other solution,” said Sen. Bill Sharer, a Republican from Farmington.
Sharer argues the new interest rate cap is unnecessary and that expanding financial literacy and access to banking services would be the best way to end consumers’ reliance on high-interest loans.
“The key is the free market,” he said.
Several groups have been working to expand access to small loans with much lower rates. A few local governments, including Taos County and the city of Las Cruces, have joined TrueConnect, which provides employees short-term loans. The program is expressly designed to prevent employees from turning to other, costlier options.
And Oportun, a company that markets itself as an alternative to payday lenders, is expanding into New Mexico.
Porter argues that these initiatives push back against the idea that no one can make a business out of lending to consumers who may have poor credit or no credit.