Advocates for consumers and those working to safeguard the vulnerable are preparing to fight a war that will not take place in the current legislature, which officially began on Jan. 19. The session officially started however, in reality, very there isn’t much work completed until after the long weekend.

The battle that won’t take place is about the interest rates on short-term loans, quick payback period, typically referred to as title or payday loans. The individuals fighting to lower the rate have made huge gains over the past few years. They are able to succeed in 2017 in reducing the rate charged for short-term, small loans down at 175 percent. They’d like to see the rate to be at least 36 percent.

Arguments on the two sides are both strong and grounded in reality as well as common sense. Both sides are in agreement on that last point. From the outside, when looking inside, a rational person can see why legislators are battling this problem.

Some say it’s excessive and also takes advantage of the weak. There are 1,300 shops located in New Mexico and most are near reservations.

Industry lobbyists insist they meet a need, and that the high-interest rate is essential to their business models. When one person cannot pay back a loan this high-interest rate structure lets other lenders “cover” the loss for the company. Dead beats are included in the model.

The study from 2013 by the Federal Deposit Insurance Corporation study revealed that more than 30% of New Mexico households used one or more of these loan options. They were mostly not homeowners, aged 25 to 34, Hispanic, lacked a high school diploma, and had a household income lower than $15,000.

A bank will look at a household’s balance sheet and ask them to send the person packing. Where do they go? In this sense, they are filling a very needed niche.

The problem begins when a person is permitted to take out more loans than they are able to repay by a less lenient time frame for repayment and a balloon payment. This is reminiscent of the financial crisis in 2008. Similar circumstances, larger loans. A similar study showed that longer-term loans are most likely returned in comparison to short-term loans (under 120 days). This is because the longer the loan term and the more expensive the monthly payments.

Then we enter the math behind compound interest. This keeps at work, quietly, against the borrower. If your balloon payments are late or the smaller installments are pushed back, interest is brought at the borrowers. A loan that they might just barely manage becomes inaccessible and becomes more expensive every month.

Northern New Mexico College’s President Rick Bailey set up a loan program for Northern employees who have True Connect. The lender’s employees can take out loans within their budgets to pay back. The payments are processed through the College’s payroll system, which means there is a guarantee that repayment will be made. This means that you can pay a lower interest rate.

Northern Human Resources Director Kenneth Lucero stated that the loans are being offered at 30% and he’s had $1,700- $2,300 in payments. The loans range from a single loan of 88 days up to a few that last for one year.

He did not know how effective the program was, but “I believe it’s aiding in the high rates market.”

This is an excellent solution to the issue, but this type of system isn’t available on the shelves of Burger King, Walmart, or Chilies. The turnover of employees is high with benefits being scarce and pay is low, so the repayment cannot be assured. These types of employees are likely to continue to be forced towards the “predatory loan” market “predatory credit” market.

A 2018 FDIC study revealed that when the rate of interest for short-term lenders was lowered to a certain amount lenders quit the state. However, the number of loans that were average remained similar. The other lenders picked up the pieces and helped make their business models work. It’s not logical to expect that the model will continue to work if states continue to reach the 36 percent threshold. In the end, the business model isn’t working and they’ll be leaving the state.

What does that mean for those who need the loans to cover the costs of crises?

The best solution for the long run is to the need to introduce financial management classes to every high school. A person with a $1,000 iPhone does not require a loan they require education. It is important to know how to manage their money before they even have money. We strongly recommend math teachers employ interest rates for teaching students to solve problems frequently and often throughout high school.

The quick answer is to create a business model that benefits lenders as well as borrowers. The changes should not include a balloon payment that could rip the lender as well as fair interest rates and reasonable payments Make loan schedules sufficient to accommodate lower monthly payments.

Another modification that needs to be implemented is to prevent people from getting multiple loans from different businesses. We’ve heard horror stories of people who borrow at one bank to fund for another and then fall behind on both. They then move to a different lender.

It’s not the case for the situation of a person who needs to borrow money in an emergency. This is someone who can’t control their finances. They require education and not “expensive” funds to indulge in frivolous spending.

We’re looking for a lender-business model that is a win-win for both lenders and borrowers. We’re not sure if constantly cutting the rate, but without altering the business model, is going to benefit either of them.