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.

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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.

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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.

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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.

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Figure 5. Break-even annual percentage rates at consumer finance companies in 2015, by loan amount

Break-even APRs were quite large for small loan amounts but declined rapidly as the loan amount increased. A $594 loan required a 103.54 percent rate, and a $1,187 loan required a still high 60.62 percent rate (figure 5). A loan amount of $2,530 is necessary to break even at 36 percent. Again, for large loan amounts the curve for break-even APRs is nearly flat. The rate is 17.48 percent for a $13,057 loan amount and 16.25 percent for a loan amount of $17,805.

Sources: 1962, (Smith 1967); 1987, American Financial Services Association, Survey of Member Companies, authors’ calculations; 2015, Federal Reserve Board, Survey of Finance Companies, authors’ calculations.

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Last Update: August 12, 2020