The Big Business of Making Small Loans

Report Outline
Revision of Existing Small-Loan Legislation
Growth of Small Loan Business Since 1910
The Cost of Extending Personal Cash Credit
Increasing Competition for Cash Loan Business
Special Focus

Revision of Existing Small-Loan Legislation

Small loan legislation is to be the subject of extensive consideration this year in the legislature of New York State, where Governor Lehman has for the second time recommended reduction of the present legal interest rates. Under the present New York law, which establishes a rate of 3 per cent a month on unpaid balances up to $150 and 2½ per cent a month on any part of the balance above that amount, licensed lenders last year served 480,000 borrowers and had average outstanding loans of $65,000,000. Industrial banks, credit unions, and personal loan departments of commercial banks in New York served an additional 620,000 accounts with average outstanding balances of about $118,000,000, according to Senator Williamson, chairman of the banking committee in the upper house of the legislature. Williamson contends that lowering the legal rate on balances below $100, as proposed by two bills which have already been introduced to carry out the governor's recommendation, would drive the licensed companies out of the business of making loans of less than that amount, and would lead to an increase of loan-shark activity.

The commissioner of the Bureau of Banking of Virginia has also announced that a revision of the Virginia small loan law is now being drafted, for presentation to the legislature when it meets next year. Forthcoming publication of a new draft of the Uniform Small Loan Law, recommended by the Russell Sage Foundation, is expected to stimulate law revision in other states where present statutes are out of date.

The importance of the small loan business is indicated by the fact that throughout the country in 1939 legal agencies engaged in the business of making personal cash loans lent an estimated $2,260,000,000 and had a balance of $1,077,000,000 in such loans outstanding at the end of the year. Despite some progress toward the suppression of loan sharks, illegal lenders probably had an additional $100,000,000 in outstanding loans. If the average balance due on all types of personal loans was $100, which is a fair rough estimate, the total number of loans at the end of 1939 was nearly 12,000,000, and even allowing for a good deal of duplication by multiple borrowers, it is evident that a very substantial percentage of employed individuals in urban communities made use of this type of credit. These figures include cash loans only, and are in addition to almost twice as much ($1,890,000,000) outstanding indebtedness for retail instalment purchases.