New Mexico legislators have proposed a constitutional amendment that would limit total charges on all short-term loans to an annual percentage rate (APR) of 36 percent. Currently, the effective APR of these loans can exceed 100 percent or 200 percent; but a 36 percent cap could eliminate most of these products.
An alternative to the interest-rate ceiling may be to try to generate other options for short-term borrowers, such as employer loans. An employer may already know whether a worker is a substantial credit risk, according to Dick Minzner, a former New Mexico Taxation and Revenue secretary. The state’s lending and employment laws would have to be altered to permit employers to make these loans and to charge fees or interest.
The availability of employer loans also would require changes in public perception, says Minzner, who recommends against the use of APR to evaluate these loans. A $500 loan for two weeks, at a fee or interest of $15 amounts to an APR of approximately 80 percent. While such a percentage rate might be criticized, Minzner says this would be a more favorable arrangement than the other types of short-term loans available in the existing market.
A market-based solution may be another alternative to existing payday loans. Advocacy groups and reform supporters say the short-term loan business could still thrive with much lower interest rates. If so, Minzner says, then a lender that charges lower rates should be able to get a substantial share of the market. He suggests that advocates who believe it is possible and important to reduce the cost of short-term loans find and fund someone who can operate a less expensive lending business. He also advises that an interim legislative committee, employers, and reform advocates address these issues before the next legislative session.