### The Cost Structure of Consumer Finance Companies and Its Implications for Interest Rates: Evidence from the Federal Reserve Board's 2015 Survey of Finance Companies, Accessible Data

##### Figure 1. NCCF estimates of credit cost of consumer finance companies in 1964, by loan amount

The National Commission on Consumer Finance estimated costs for loan amounts ranging from \$100 to \$3,000 (\$594 to \$17,805, in 2015 dollars). Estimated costs rose from \$55.06 for a \$100 loan to \$231.80 for a \$3,000 loan. As a percentage of loan amount, however, costs declined. Costs declined from a little more than half of the loan amount for a loan of \$100 to 7.73 percent of the loan amount for a loan of \$3,000 (figure 1). As a percentage of loan amount, costs decline steeply at first and then more gradually as loan amount continues to rise.

Source: NCFF (1972), exhibit 7-16.

##### Figure 2. Break-even annual percentage rates at consumer finance companies in 1964, by loan amount

As costs are large relative to loan amount for small loans, break-even APRs are quite high for small loan sizes. The break-even APR is 91.36 percent for a \$100 loan (\$591 in 2015 dollars) and 53.14 percent for a \$200 loan (\$1,187 in 2015 dollars). A frequently suggested maximum for annual percentage rate is 36 percent. The loan amount needed to break-even at 36 percent is \$332 (\$1,960 in 2015 dollars). Break-even APRs become nearly flat for larger loan amounts. The break-even APR is 15.04 percent for a \$2,200 loan and 13.98 percent for a \$3,000 loan.

Source: NCFF (1972), exhibit 7-16.

##### Figure 3. Break-even annual percentage rates at consumer finance companies in 1987, by loan amount

Break-even APRs are estimated over the loan amount range \$327 to \$9,802, the 1987 equivalent to the NCCF’s \$100 to \$3,000 loan amount range. Economies with respect to loan amount produce large break-even APRs for small loan amounts. The break-even APR is 156.99 percent for a \$322 loan amount (equivalent to \$100 in 1972) and 89.46 for a \$653 loan amount (equivalent to \$200, figure 3, the horizontal axis covers the same range of loan amounts expressed in 1987 dollars). The loan amount for a 36 percent break-even APR is \$2,181. Again, break-even APRs are nearly flat at larger loan amounts—18.60 percent for a loan amount of \$7,188 and 16.53 for a loan amount of \$9,802, for example.

Source: American Financial Services Association, Survey of Member Companies, authors’ calculations.

##### Figure 4. Operating cost per \$100 of receivables in 2015, by average amount of accounts

Operating cost falls rapidly as average account size increases. For larger average account sizes (about \$3,000 or higher) operating costs are flat.

Source: Federal Reserve Board, Survey of Finance Companies, authors’ calculations.