Dr. Tom Miller's Op. Ed. Article Featured in the The American Banker
8-4-15 - Dr. Thomas W. Miller, Jr., professor of finance and Jack R. Lee Chair of Financial Services and Consumer Finance, was recently featured in the The American Banker, for an opinion piece, titled, "Why a 36% Cap Is Too Low for Small-Dollar Loans." Below is an excerpt of the article:
"Small-dollar installment loans remain an important nonbank-supplied consumer credit product. Installment lenders carefully identify potential borrowers who will be able to repay the loan. Only about half the people seeking an installment loan get one. Those denied must find another credit source.
During a recent state legislators' conference, this question arose: "Why can't installment lenders make money at a 36% APR?" They can if the dollar amount borrowed is large enough to generate enough interest income to cover the costs and risks of making the loan. A $300, 12-month, 36% APR installment loan generates $61.66 in interest income. Why were $300 installment loans profitable in 1916, but not in 2015? Although the interest income is the same, the loan production costs, including wages, benefits, rent, and utilities have dramatically increased over time. The consumer price index is about 20 times higher in 2015 than it was in 1916.
The Uniform Small Loan Law of 1916 states that a rate established by legislators "should be reconsidered after a reasonable period of experience with it." Clearly, the succeeding 100 years exceeds "a reasonable period." Today, a $300 installment loan is simply not profitable at a 36% interest rate. Neither are payday loans. The result is that a legal loan desert exists in the small-dollar loan landscape. There is demand, but no supply."
Disclaimer: The views and opinions of Dr. Miller do not necessarily reflect those of Mississippi State University, the College of Business, the Department of Finance and Economics, or employees thereof.
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