The Social Cost of Federal Finayicing 95 



cent on loans within families) to over 30 per cent on some small 

 loans of finance companies. This range can be narrowed by study- 

 ing the composition of personal debt. Of the $36 billion out- 

 standing at the end of 1955, $14 billion was automobile paper.^^ 

 The rates of most automobile paper were between 8 and 12 per 

 cent, with that held by banks near the lower figure and by finance 

 companies near the higher one. Another $6 billion was for other 

 consumer goods paper, which has comparable rates. Personal loans 

 constituted $8 billion. Of these the small loans which bore very 

 high rates were offset to some degree by low rates on bank loans 

 available to the best of the credit risks. Of the remaining, about 

 half were charge accounts and the rest were service credit and 

 repair and modernization loans. The rates on these categories 

 tended to be relatively low, ranging from 6 per cent on regular 

 charge accounts to 9 per cent on modernization loans. The average 

 rate for personal debt suggested by these figures is about 10 per 

 cent. A breakdown by type of holder is consistent with this 

 estimate, since banks hold 33 per cent, credit unions 5 per cent, 

 stores 25 per cent, sales finance companies 28 per cent, and others 

 9 per cent. It would be incorrect, however, to assume that all 

 income classes pay the same rates. Generally, poorer people obtain 

 small loans at very high rates and borrow from sales finance com- 

 panies for their durable goods purchases; those with higher incomes 

 are able to obtain bank loans and have charge accounts. To allow 

 for this factor, we assume a rate of 12 per cent for consumer credit 

 for those with the lowest income and a rate of 9 per cent for the 

 rest. 



Interest payments are deductible from federal income taxation. 

 This implies that the actual rate which governs the choice of con- 

 sumers is not the rate paid, but the rate adjusted for the saving 

 in taxes. But the applicability of this reasoning is limited by the 

 wide use of the standard deduction in income tax returns. Itemized 

 deductions were made on only 8 per cent of the returns for $3,000 

 or less; 24 per cent for $3,000 to $5,000; and 40 per cent for $5,000 

 and over. Because the tax saving from this source is usually more 

 significant in the case of mortgages, we use the borrowing rate 

 after taxes only in the case of households with mortgages. 



" U. S. Department of Commerce, Survey of Current Business, March 1956, 

 p. S-16. 



