Technology leads way to fair small-dollar, short-term loans

For years, the state of New Mexico has struggled to rein in predatory lenders — those who keep New Mexico’s poor, uneducated and financially desperate on a treadmill of debt with fees, unlimited rollovers and interest rates that have gone as high as 1,500 percent.

And while, most recently, the 2017 N.M. Legislature capped interest rates at 175 percent and mandated that borrowers get at least 120 days to repay in at least four installments, the complaints against unscrupulous lenders continue. The Regulation and Licensing Department’s Financial Institutions Division received four against licensed small-loan lenders in the first half of 2018.

So it is heartening that technology and the free market are joining New Mexico’s attorneys general, courts and lawmakers to provide folks who need a small, short-term loan an option other than usury.

U.S. Bank, the nation’s fifth-largest bank, is rolling out Simple Loan to its depositors. It will charge $12 for every $100 borrowed — up to $1,000 — if borrowers repay using autopay from their U.S. Bank savings or checking accounts. That increases to $15 for every $100 borrowed if repaid manually, i.e. by check. And that means someone who borrows $300 will wind up paying $336 over three months if the repayment amount is deducted automatically from a U.S. Bank account.

For years banks did not bother with these fix-my-car/ tide-me-over-til-payday loans, because the interest they earn didn’t pay for the loan officer’s time. But now, mobile phone apps and online banking have made it possible for banks to offer them and still make money.

An added bonus is that these short-term loans could offer consumers a way to build credit. While U.S. Bank will require borrowers to have established credit histories, it is working with credit-rating agencies to consider the loans in building borrowing records.

There’s no question New Mexico will continue to have to police the lending industry for bad actors that prey upon folks who just need a small loan to cover emergency expenses or keep the lights on until payday. But U.S. Bank is showing that, with today’s technology, it’s possible for the market to offer small-dollar, short-term loans at reasonable rates to the general public, and thus prevent more folks from falling into a cycle of debt.