As New Mexico opened the second session of the 55th legislature, five Democrats introduced a bill that, despite good intentions, would make credit inaccessible for thousands of the state’s residents. While well-intentioned, House Bill 132 would be particularly harmful to the residents of a state that routinely has one of the lowest per capita incomes and highest poverty rates in the country.

If passed, HB132 would cap interest rates on short-term loans at 36%, down from a maximum of 175%. The cap on interest rates is explicitly designed to reign in payday lenders who offer short-term loans at high interest to consumers who present a significant risk of default.

If HB132 passes, New Mexico will join 18 other states and the District of Columbia in capping interest rates at 36%.

Bills that cap interest rates are politically popular. A January 2020 survey found that 70% of American voters support a federal cap of 36% on payday loans, with many calling for the cap to be much lower. Additionally, the same survey found that 62% of voters held an “unfavorable impression of payday lenders.” 

While payday loans are maybe unpopular, they serve a clear need for consumers. It is estimated that 12 million Americans take out a payday loan each year, with the average loan amount being $375. The average income of those who take out payday loans is just $30,000. Given the income demographics of those who use payday loans, it is clear that any effort to limit how payday loan companies operate could see low-income New Mexicans denied access to credit.

Payday loans are an attractive option for New Mexicans because they are significantly easier to acquire than other forms of credit. While banks may require credit histories, payday loans often only require “a source of income and a valid identification.” The low barriers to obtaining a payday loan mean they are available to almost anyone who needs one and offers an essential source of credit to those who are excluded from traditional lenders.

Payday loans also allow New Mexicans to pay for surprise bills. A 2016 study by the Global Strategy Group, the Terrance Group, and the Community Financial Services Association of America found that “96% say their payday loans…have been useful to them personally” in meeting unexpected financial commitments. Furthermore, borrowers have stated the principal reason they turned to payday loans (57%) was “to pay for an unexpected expense – such as car repair or medical emergency.”

Removing the incentive for payday loan companies to undertake these significantly riskier loans would ultimately give New Mexicans fewer options when faced with surprise bills, forcing them into unnecessary economic insecurity.

While legislative efforts to rein in payday loans may be well-intentioned and politically popular, these efforts pose substantial risks to low-income New Mexicans who depend on access to short-term credit that traditional lenders cannot offer due to the risky nature of these loans.