Ballot proposal would cap ‘predatory’ interest rates for payday loans
LANSING, MI — A polling committee is busy asking a question about the November ballot that would prevent payday lenders from charging “predatory” interest rates if approved by voters.
The Michiganders for Fair Lending campaign officially launched its petition-raising effort Wednesday to cap high interest rates on payday loans, payday loan advocates say are creating a cycle of indebtedness that is becoming impossible to escape. . The group said it wants to change the current payday loan landscape to one that provides access to small loans to those in need, not a debt trap.
“Payday lenders are targeting Michigan’s most vulnerable communities by offering quick cash that traps people in an endless cycle of debt with outrageously high interest rates,” said Michiganders spokesman Josh Hovey. for Fair Lending.
“State lawmakers have been urged for years to end predatory lending practices. People harmed by these loans cannot afford to wait any longer. That’s why we’re putting the issue directly to voters in November. »
In Michigan, the typical payday loan carries the equivalent of a 370% annual percentage rate (APR). The Michiganders for Fair Lending proposal would cap payday loans at a maximum of 36% APR.
Payday loans are marketed as short-term, but the vast majority of borrowers are caught in a cycle of long-term debt, say fair lending advocates. About 70% of Michigan payday borrowers borrow again the same day they repay a previous loan, according to a Consumer Financial Protection Bureau study. The same study found that the average payday loan borrower ends up taking out 10 loans over the course of a year.
Michigan Attorney General Dana Nessel describes a payday loan as a short-term, high-cost transaction where customers borrow money for a service fee. Michigan law calls this type of loan a “deferred presentment service transaction” because the customer’s check is held for a period of time before being cashed. Loans are not like car payments because borrowers are unable to make installment payments.
Payday loans have high service fees and a short repayment period. For example, a customer who borrows $100 for two weeks and is charged $15 will pay a service fee equal to a three-digit APR. The actual cost of the two-week loan is $15, which equates to an APR of 391%. And that still doesn’t include additional fees for “eligibility checks” or processing.
Payday loan shops often allow customers unable to repay the loan to take out a second payday loan to pay off the first. Service charges can lead the customer into a cycle of debt.
“It’s a slippery slope,” Nessel said in a process-focused consumer alert.
Fair lending advocates say payday loan shops are unquestionably predatory. Stores are deploying manipulative tactics and engaging customers in a process that creates a cycle of debt that traps people in poverty, Hovey said.
“Stopping predatory lending is an issue in Michigan that resonates across all parties, geographies, age and income levels. Even in today’s divisive climate, this is an issue the vast majority of people can agree on,” said Jessica AcMoody, director of policy at the Community Economic Development Association of Michigan.
“Lenders know they are getting their money because they have direct access to the borrower’s bank account and can get their own money back before the borrower can pay rent, utilities or food. With no funds left over for basic living expenses, guess what happens? You guessed it. The borrower returns to take out another loan,” AcMoody said.
Gabriella Barthlow, a financial coach with the Macomb County Veterans Service, said she’s seen the predatory payday loan process play out with the veterans she works with. Military veterans are particularly vulnerable to predatory lending, Barthlow said.
“As a targeted community for predatory lending, it’s critical that veterans understand the risk associated with payday loans and the importance of a 36% interest rate cap,” Barthlow said.
The 36% APR cap used by many states is similar to the National Military Loans Act, which sets consumer credit protections for active military members. Congress passed the law in 2006 after the military found payday lenders setting up stores near military bases.
Dallas Lenear of Project Green, a Grand Rapids-based financial education nonprofit, said he was motivated to help try to change the laws after hearing first-hand stories about interest rates. excessive that trapped people in financial ruin.
“Payday lenders exploit our most vulnerable communities and neighbors without consumer protections,” said Dallas Lenear of Project Green in Grand Rapids. “People go to payday lenders because they feel they have no other choice. They get stuck in quicksand that imprisons them for months and sometimes years. »
Payday lenders also disproportionately locate their stores in communities of color. Statewide, there are 5.6 payday loan stores per 100,000 residents. That number is 25% higher in majority black communities, Lenear said.
Michigan would join 18 other states and Washington DC that have set a payday loan rate limit of 36% APR or less. Voters in Nebraska, Colorado, South Dakota and Montana passed per-vote payday loan rate caps that all got more than 70% voter approval.
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