A recent story out of New Mexico is yet another warning for states turning to interest rate caps to solve paycheck-to-paycheck living. While a bill was being passed capping interest rates at 36 percent, a business-owner-turned-former-state-representative was allegedly working on her own scheme.
Tara Jaramillo (D-NM) runs a company called Positive Outcomes, Inc., offering services like physical therapy and early intervention. In a black market-like turn of events, low-income employees were allegedly offered under-the-table advance loans that included wage garnishment and a 15 percent bi-weekly interest rate. Access to short term loans is historically harder to get once interest rate caps are in place and bans do not address the demand for a service.
Interest rate caps are a form of price controls. Reduced competition and product supply are the results of such price controls. When interest rates are set artificially low, 36 percent in New Mexico, lenders are often limited from setting prices that are profitable. Subsequently, fewer loans become available, and supply becomes limited. Those who lean on loans to pay rent and other basic bills still need loans, but their access and availability diminishes.
In 2023, PEW Research reported that major banks were offering short-term loans. The report stated that these loans were a better alternative for those who rely on payday loans as they charge a much lower interest rate. The report cited that these loans help Americans who tend to overdraft their accounts and face eviction or other results of being unable to pay their bills.
But the reality is these loans are not made for those who rely on alternative loan options. One example is Bank of America that offers short-term loans at low interest rates. A review of their “Balance Assist” program shows customers are required to have had a bank account with them for at least a year (2.5 years if they do not have credit) before they can even qualify for loans up to $500. There is a minimum amount of $100 required to open an account.
This minimum balance to open an account at a traditional bank is tricky to reach according to the National Survey of Unbanked and Underbanked Households. The report found that 4.2 percent of households were unbanked with 42.3 percent citing they “don’t have enough money to meet minimum balance requirement(s).” For those who are unbanked, these short-term loans, like the ones from Bank of America, are not even options.
Capped interest rates leave those who are low income, less educated, or living with a disability in circumstances that could make their situation worse. Without credit access, they may incur non-sufficient funds (NSF) fees from bounced checks, avoid paying for necessities like food or rent, or be forced to seek out illegal lenders.
And sadly, price controls lead to corruption such as illegal lenders much like the alleged Jaramillo scheme. Those who are desperate for loans will find a way to get them. All too often, these desperate attempts can lead to exploitation of some form as these alternative options offer little for consumer protection. As a result, government intervention would again be needed to solve the problems that would inevitably arise.
The best way to approach high interest rates is to let the market adjust based on supply and demand rather than letting lawmakers determine price ceilings. Promoting competitive markets is key to bringing down prices and helping the low-income consumer. When it comes to price controls, less government intervention is truly heroic.
Leah Locke is a policy analyst at the American Consumer Institute, focusing on finance and insurance policy. Prior to joining ACI, she worked in various operations roles in property and casualty insurance. She holds a Master of Education degree in history from Liberty University. She is pursuing a Ph.D. in history at Liberty University. The American Consumer Institute is a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.