Big Rates for Little Guys

By John Greenwald

The prime has been halved, but small borrowers still pay dearly for loans

Customers of Bank of America have reason to feel a bit perplexed these days. Giant companies can now borrow from the San Francisco-based lender at a prime rate of 10 1/2%, down from a peak of 21 1/2% at the end of 1980. But the little guy who may need a few thousand dollars for a spring vacation or a home computer is getting no such break from the biggest U.S. bank. He must pay 19% for an unsecured personal loan, off somewhat from last fall's high of 25% but still a towering rate. Similar chasms between business and consumer charges are now common in banks across the U.S. Says Irwin Kellner, economist and senior vice president at Manufacturers Hanover Trust in New York City: "Unlike the prime rate and other lending rates to business, which have come down considerably from their recent peaks, consumer lending rates have hardly budged at all, and in some cases are higher today than one and two years ago."

The unyielding interest charges include those on loans used to buy cars, improve homes and make credit-card purchases. All such debt totaled a record $342 billion in January. Commercial banks, which made nearly 45% of those loans, were by far the largest single lender. The failure of bank rates to fall much has widened the spread between what banks pay for some key funds and what they extract from small customers (see chart). It has also raised cries that the lenders are gouging consumers to make up for losses on loans to big borrowers the banks had no business courting in the first place. Declares Kay Pachtner, co-director of San Francisco's Consumer Action: "There's no question about it. The banks made some horrible decisions about what they chose to finance in foreign countries, and we're paying for all of that."

President Reagan's attacks on high interest rates in general have helped to fuel the furor. Reagan, apparently fearing that heavy borrowing costs could choke off the recovery, renewed his criticism last week while denouncing a banking industry drive against withholding taxes on dividends and interest. Snapped he: "It would be far better if the bankers spent less time lobbying and more time lowering interest rates." Reagan began trying to talk down rates in February by charging that they were too high in relation to the current low level of inflation. That argument suffered little last week when the Labor Department reported that February's Consumer Price Index fell by 0.2%.

Some banks are finally moving to lower their consumer rates. The Bank of New York last week sliced its charges 1 percentage point to 3 1/2 percentage points, depending on the type of loan. The cuts brought personal loans, which had been as high as 19 1/2%, down to 16%, and dropped home-improvement loans to 14 1/2%. Amalgamated Bank of New York, which is owned by the Amalgamated Clothing and Textile Workers Union, last week reduced its personal-loan rate to 14 1/4% and trimmed the interest on automobile credit. Sun Bank, N.A., the largest bank in central Florida, trimmed 1 percentage point off all consumer lending rates and is keeping three of its branches open Saturday mornings to hand the money out. A personal loan at the bank now costs 14%. Says Senior Vice President Michael Loggins: "We're out there telling people that we've got money to lend and we've got good, attractive rates, so come on in."

Many bankers, however, seem more eager to defend their high consumer rates than to do much about lowering them. Foreign loans are not the problem, some say, because personal-banking divisions are not in the habit of compensating for blunders made by their colleagues in the international division. And there is no question, as the bankers like to point out, that the personal lenders are paying a lot more for their money than they did prior to 1981, when the ceilings on interest on small deposits began coming off. Currently, for example, banks are paying slightly more than 8% on the new money-market accounts. Since a substantial chunk of the $319 billion in those accounts was transferred from ones that paid only 5 1/2% or less until the ceiling was lifted, the new instruments have been putting pressure on bank earnings. Says Stephen Phillips, executive banker at National Boulevard Bank of Chicago, which charges 14 1/4% for personal loans: "Since we are paying a higher rate of interest to our depositors for their money, we then have to pass that rate along to our borrowers."

Bankers also insist that consumer loans are the most expensive ones they make. "What people don't realize is the cost of servicing these loans," says Richard Pollard, executive vice president of BayBanks Corp., a major Boston-based bank holding company. High delinquency rates plus the paperwork needed for monthly billings add 5 percentage points to the cost of providing a consumer loan, he says; that compares with a mere half percentage point for business loans.

Other moneymen blame uncertainties about the economy for the high cost of consumer loans, which generally have fixed rates and terms of two to four years (business loans, such as those made at the prime rate, usually are for shorter terms). They worry lest runaway federal deficits reheat inflation. That could raise their cost of money and make loans written at lower rates unprofitable. Notes John Broderick, executive vice president of California's Crocker Bank: "As long as there is uncertainty as to what kind of spreads are in front of us, you will see a reluctance to draw rates down to where they would be if there were more confidence."

Some consumers show sympathy for this view. Jim Silverman, 32, an electronics-company manager from Brockton, Mass., borrowed $3,000 at 17% from a credit union to buy a trailer. A bank had wanted 19%. While Silverman is not happy with the interest he must pay, he says he can understand it. Observes he: "I think lenders are scared of fluctuations. If they lower their terms and rates go up again, they will get caught."

Lately, some less timid lenders have appeared on the scene. One of the most aggressive is Dreyfus Corp., the mutual-fund company that helped bring high interest rates to small savers by introducing one of the first money-market accounts. Dreyfus now hopes to spur a similar revolution among small borrowers. Says Chairman Howard Stein: "The money funds became the voice of the people by allowing them to negotiate better rates of return. What consumers need now is a voice on the lending side, because it's the borrower who's hurting today."

Dreyfus last year bought the small Lincoln State Bank in East Orange, N.J., which is making new-car loans for 11%, a cut below the 11.9% bargain rate the major automakers have been using to attract buyers. The bank is also offering 12 1/4% mortgages, well below the average rate of 13% charged by other New York-area banks.

Savings and loan associations are another lusty new source of consumer loans. Though many S and Ls were on the brink of collapse last year, they have greatly improved their prospects by diversifying out of mortgages and into other forms of consumer lending permitted by the 1982 Depository Institutions Act. In California, First Nationwide Savings is opening five offices in J.C. Penney stores to offer not just mortgages but a full line of consumer credit. In Chicago, customers walking into First Federal Savings and Loan are being given flyers pushing the outfit's auto loans, which were slashed in February from 18% to 12.9%. "Our car business has improved phenomenally," says Vice President Ken Williams.

Many consumers have other ways of borrowing on the cheap. Although it is not always recognized, a margin loan from a securities firm can be used to finance a broad array of personal activities. The most common usage, of course, is to buy stock on credit, using the shares as security. But if the customer already owns the shares, he can put them up as security for a cash loan. Currently, with the margin rate at 11.5%, this is a very good deal. Employee-owned credit unions, which cut their costs to keep rates down, are yet another source of inexpensive money.

Some banks have already decided the field is too crowded. In Chicago, Harris Trust and Savings Bank has scarcely lowered its high consumer rates since last summer, a sure sign that it is not after the loans. The bank, which once guaranteed every depositor a personal banker, now restricts that service to those with big accounts. Says Consumer Banking Officer Teresa Patton: "We're here, but not like we used to be." As competition for consumer loans grows, more and more banks may decide the time has come to let the business go. -- By John Greenwald. Reported by William R. Doerner/San Francisco and Frederick Ungeheuer/New York

With reporting by William R. Doerner/San Francisco, Frederick Ungeheuer/New York This file is automatically generated by a robot program, so viewer discretion is required.