Business: Small Loans

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At present, however, the centre of the interest argument concerns the 3^% monthly or 42% in a year which the Russell Sage Foundation says it is fair for personal finance companies to charge. In some States where the legislatures have passed the Small Loan Law, attempts are being made to cancel it. Investigation has shown that much of the propaganda against small loan companies is directed by unregulated usurers who know they will lose their business in competition with licensed personal finance companies. But in addition to these sources, many contentions are heard that 42% is usurious.

Usually overlooked in the great interest argument is the fact that a small loan cannot be compared to a big commercial loan. The clerical cost of making a $100 loan is as great as for making a $100,000 loan, and the risk is much greater. The Russell Sage Foundation estimated that 42% per annum was the minimum at which new capital could be brought into the small-loan field, and the results have indicated that this was the case, that profits have not been excessive. It is the Foundation's conviction that rates can and will come far down as the field is developed.

It is the cost of making the loan, plus the risk, that fixes the rate. Evidence of this is seen in a comparison of Beneficial Industrial Loan Corp. and Household Finance Corp. Beneficial handles mostly small loans (down to $10), charges 3½% a month. Household handles no loan smaller than $100, charges 2½% a month. Household openly advertises: ". . . Any licensee who makes loans of less than $100 and a certain class of loans in larger amounts is, in our opinion, entitled to and is justified in charging the maximum rate of 3½%. a month. We could not afford to make loans of less than $100 at less than [3 1/2%]."

The personal finance companies argue that, while their rate is higher than that of the industrial (Morris Plan) banks, the fact that they do not require co-makers is of great convenience and value to borrowers.

Summary—Although conditions vary, the would-be small borrower faces this general situation:

Agency Annual Rate Under Low Cost Annual Rate Under High Cost

Life Insurance Companies, policy loans. 6% 6%

Share Loans by Building & Loan Societies. 6 12

Chartered Credit Unions .......... 6 18

Personal Loan Departments. Commercial Banks 9 22

Installment Finance Companies ....... 16 25

Industrial Banks.... 17 34

Remedial Loan Societies ......... 12 36

Personal Finance Companies ....... 30 42

Pawnbrokers ...... 12 120

Salary-buyers ....... 120 480

^{*California, Iowa, Kentucky, Maine, Maryland, Michigan,
Mississippi, Missouri, New York, Ohio, Oregon, Rhode Island, Texas,
Utah, Virginia, Washington.

† Arizona, Colorado, Connecticut, Georgia,
Indiana, Minnesota.}