Ballot Proposal Would Cap ‘Predatory’ Interest Rates for Payday Loans

Courtesy of By Samuel J. Robinson,

Michigan State Capitol

A ballot committee is working to put a question on the November ballot that would stop payday lenders from charging “predatory” interest rates if approved by voters.

The Michiganders for Fair Lending campaign officially launched its petition drive effort Wednesday to cap high payday loan interest rates advocates say create a cycle of debt that becomes impossible to escape. The group said it wants to change the current payday loan landscape to one that gives access to small loans to those that need them, not one that creates a debt trap.

“Payday lenders target Michigan’s most vulnerable communities by offering quick cash that traps people into an endless cycle of debt with outrageously high interest rates,” said Michiganders for Fair Lending Spokesperson Josh Hovey.

“State lawmakers have been urged for years to put a stop to predatory lending practices. The people being harmed by these loans cannot afford to wait any longer. That’s why we’re bringing the issue directly to voters this November.”

In Michigan, the typical payday loan carries the equivalent of a 370% annual percentage rate (APR). Michiganders for Fair Lending’s proposal would cap payday loans at no more than 36% APR.

Payday loans are marketed as short-term, but the vast majority of borrowers get caught in a long-term debt cycle, fair lending advocates say. Roughly 70% of payday borrowers in Michigan borrow again the same day they pay off a previous loan, according to research from the Consumer Financial Protection Bureau. 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 it’s cashed. The loans aren’t like car payments, as borrowers aren’t able 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 triple-digit APR. The actual cost of the two-week loan is $15, which equals a 391 percent APR. And that’s still not included additional fees for “eligibility checks” or processing.

Payday loan stores often let customers unable to repay the loan take out a second payday loan to pay off the first. Service fees can cause the customer to be stuck in a cycle of debt.

“It’s a slippery slope,” Nessel said in a consumer alert focused on the process.

Fair lending advocates say payday loan stores are undoubtedly predatory. Stores deploy manipulative tactics and enter customers into a process that creates a cycle of debt that traps people into poverty, Hovey said.

“Stopping predatory lending is an issue in Michigan that resonates across parties, geographic regions, age and income levels. Even in the divisive climate of today, this is one issue that the vast majority of people can agree on,” said Jessica AcMoody, policy director at the Community Economic Development Association of Michigan.

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