Consumer advocates and those trying to protect those less fortunate are bracing for a fight that likely won’t happen during this year’s short legislative session, which officially began Jan. 19. Long weekend.

The fight that probably won’t take place is over the interest rates charged on short-term loans, often called payday loans or title loans. People who fight to lower rates have made great strides over the years. In 2017, they succeeded in raising the rates charged on small short-term loans to 175%. They would like that number to be 36%.

The arguments on both sides are solid and based on facts and common sense. We understand that both parties disagree with this last statement. But from the outside, looking inside, a reasonable person can understand why lawmakers wrestle with this issue.

Advocates say it’s too much and takes advantage of the poor. There are 1,300 stores in New Mexico and most are close to reservations.

Industry lobbyists insist they are filling a need and that the high interest rate is necessary for the business model. In short, when one person defaults on a loan, the high interest rate model allows other payers to “cover” the loss to the business. Deadbeats are integrated into the model.

A 2013 study by the Federal Deposit Insurance Corporation found that nearly 30% of New Mexico households use one or more of these loan services. Most were non-homeowners, between the ages of 25 and 34, Hispanic, did not have a high school diploma, and had household incomes of less than $15,000.

A bank would simply glance at such a person’s household balance sheet and send them packing. So where are they going? In this regard, these lenders occupy an indispensable niche.

The problem starts when a person is allowed to borrow more than they can repay, with a shorter repayment schedule and a lump sum payment. It’s reminiscent of the real estate crash of 2008. Same circumstances, bigger loans. The same study found that longer-term loans were more likely to be repaid than short-term loans (less than 120 days). Indeed, the longer the duration, the lower the payments.

But then we get into compound interest calculation, which always works quietly against a borrower. When the lump sum payment is missed or smaller payments are postponed, interest plummets on borrowers. A loan that they could possibly barely afford becomes completely unaffordable and becomes more and more monthly.

Former Northern New Mexico College President Rick Bailey set up a loan program in 2019 for Northern employees with True Connect. Through this lender, employees can borrow money within their means to repay. Payments are made through the College payroll system, so there is a money back guarantee. This allows for a more affordable interest rate.

North human resources manager Kenneth Lucero said the loans were at 30% interest and he had seen installments of $1,700 to $2,300. Loans range from one to 88 days to some one year.

He said he wasn’t sure how successful the program was, but “I think it helps with the higher rate market.”

This is a good answer to the problem, but this type of system is not found at Burger King, Walmart or Chili’s. Staff turnover is high, benefits few, salaries low and reimbursement cannot be guaranteed. These types of employees will continue to be pushed into the “predatory lending” market.

A 2018 FDIC study found that when interest rates from short-term lenders were lowered to a point, lenders left the state. However, the number of average loans remained fairly stable. The remaining lenders took over and made the business model work. It is unreasonable to assume this will work as states continue to approach the magic 36% rate. Eventually the business model will not work and they will leave the state.

What about people who need these loans to get through emergencies?

The long-term answer is to force financial management courses in all secondary schools. Someone with a $1,000 iPhone doesn’t need a loan, they need an education. People have to learn how to manage their money before they have money. We strongly suggest that math teachers use interest rates often and consistently for classroom problem solving throughout high school.

The short-term answer is to create a business model that works for lenders and borrowers. Changes should include no lump sum payments to crush a borrower, fair interest rates with affordable payments, loan terms long enough to accommodate those lower payments.

Another change that needs to be made is to prevent borrowers from taking out multiple loans from different companies. We’ve heard many horror stories of people borrowing from one lender to pay another, only to fall behind on both. Then they move on to a third lender.

This does not describe an emergency borrower. He is someone who does not know how to manage his money. They need education, not more “expensive” money to spend lightly.

We need a lender business model that works for both borrower and lender. We’re not sure that continuously lowering the rate, without changing the business model, will work for either.