New Mexico has long been plagued by predatory lending. The state has a small loan store for every 3,819 residents (by comparison, there is one McDonald’s restaurant for every 23,298 New Mexicans). Eighty-five percent of these predatory lenders are owned by out-of-state corporations. Their loans, which carry triple-digit annual interest rates, trap many New Mexicans in cycles of debt that are impossible to escape from. Four out of five supposedly short-term loans are refinanced or rolled over rather than paid off, and many New Mexicans end up taking out multiple loans to pay off an initial one.
Predatory lenders are drawn to states that allow high interest rates and have relatively lenient regulatory environments. The concentration of predatory lenders in New Mexico is due in large part to the fact that our state allows small loan companies to charge interest rates as high as 175% annually, one of the highest rates allowed in any state – five times higher than the national average.
From the 1950s through the early 1980s, New Mexico, along with many other states, capped the annual interest rates on small loans at 36%. This interest rate cap worked well until an accident of history intervened. High inflation during the late 1970s and early 1980s drove up national interest rates, and in 1981, the New Mexico legislature abolished its limitations on interest rates for all loans in the state. In the following years, predatory lenders flooded into New Mexico, with the number of small loan stores growing by over 1,400% during the 1990s. It took until 2017 for New Mexico to reinstate an interest rate cap on small loans, and it was set at the extremely high level of 175% per year.
Think New Mexico recommends that the legislature and governor bring New Mexico in line with most other states by cutting the state’s maximum annual interest rate on small loans from 175% to 36%.
This reform is consistent with the laws in a growing number of states. In just the last five years, Montana, South Dakota, and Virginia capped annual interest rates on small loans at 36%. In addition, in 2006, Congress passed the Military Lending Act, which capped the cost of credit provided to military families at 36%. This federal law already protects 17,741 active duty, national guard, and reserve members in New Mexico from high-interest predatory loans.
In order to not just protect New Mexicans from predatory lenders but also empower them with the tools to better their financial situations, Think New Mexico recommends making a course in financial literacy or personal finance a high school graduation requirement and adding it to the state’s education standards.
Seventeen states, including several of New Mexico’s neighbors, have enacted this reform in the last decade and are already seeing positive results. New Mexico currently ranks 47th for overall financial literacy according to the online personal finance website WalletHub. Since 2008, financial literacy has been offered as an elective in New Mexico’s high schools, but only about 10% of eligible students currently enroll in the course.
Think New Mexico will be advocating for these reforms during the 2021 legislative session. Sign up for our email alerts and follow our Facebook and Twitter pages to stay informed and get involved on this issue!