LANSING, MI — An election committee is working to put a question on November’s vote that would block payday lenders from charging “predatory” interest rates if voters approve them.
The Michiganders for Fair Lending campaign officially launched its petition campaign on Wednesday to cap interest rates on high payday loans. Proponents say it creates a debt cycle that is impossible to escape. The group said it wants to change the current payday loan landscape to one that gives access to small credit to those who need it, rather than one that creates a debt trap.
“Payday lenders are targeting Michigan’s most vulnerable communities by offering quick bucks that lock people into an endless cycle of debt at outrageously high interest rates,” said Josh Hovey, spokesman for Michiganders for Fair Lending.
“State legislatures have been called upon for years to stop predatory lending practices. The people harmed by these loans cannot afford to wait any longer. That is why we are bringing the issue directly to the voters in November.”
In Michigan, the typical payday loan carries the equivalent of an annual percentage rate (APR) of 370%. The Michiganders for Fair Lending proposal would limit payday loans to no more than 36% APR.
Payday loans are marketed as short-term, but the vast majority of borrowers end up in a long-term debt cycle, fair lending advocates say. According to a study by the Consumer Financial Protection Bureau, about 70% of payday borrowers in Michigan re-borrow a loan on the same day they paid off a previous loan. The same study found that the average payday loan borrower takes 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 in exchange for a service fee. Michigan law calls this type of loan a “deferred presentation service transaction” because the customer’s check is held for a period of time before it is cashed. The loans are not auto payments because the borrowers cannot make installment payments.
Payday loans have high service fees and short repayment times. Example: A customer who borrows $100 for two weeks and is billed $15 pays a three-digit APR service fee. The actual cost of the two-week loan is $15, which is an APR of 391 percent. And that’s still not additional fees for “eligibility checks” or processing.
Payday loan deals often allow customers who are unable to repay the loan to take out a second payday loan to pay off the first. Service fees can leave the customer 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 deals are undoubtedly predatory. Stores employ manipulative tactics, baiting customers into a process that creates a debt cycle that traps people in poverty, Hovey said.
“Stopping predatory lending is an issue in Michigan that cuts across parties, geographies, age and income levels. Even in today’s climate of division, this is an issue that the vast majority of people can agree on,” said Jessica AcMoody, policy director at the Community Economic Development Association of Michigan.
“Lenders know they are getting their money because they can get direct access to a borrower’s bank account and get their own money back before the borrower can pay rent, utilities or groceries. Guess what happens when there’s no money left over for basic living expenses? You guessed it. The borrower comes back to take out another loan,” AcMoody said.
Gabriella Barthlow, a financial trainer with Macomb County Veterans Service, said she’s seen the predatory payday loans play out among the veterans she works with. Military veterans are particularly vulnerable to predatory lending, Barthlow said.
“As a target 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 credit law, which provides consumer credit protection for active duty military personnel. Congress passed the law in 2006 after the military found that payday lenders were setting up stores near military bases.
Dallas Lenear of Project Green, a nonprofit financial education organization based in Grand Rapids, said he was motivated to help try to change the laws after hearing firsthand stories of inflated interest rates that people in the would have driven financial ruin.
“Payday lenders are taking advantage of our most vulnerable communities and neighbors without consumer protection,” said Dallas Lenear of Project Green in Grand Rapids. “People go to payday lenders because they feel they have no choice. They get stuck in the quicksand, which traps them for months and sometimes years.”
Payday lenders also disproportionately place their deals in communities of color. Statewide, there are 5.6 payday loan deals per 100,000 residents. That number is 25% higher in majority-Black communities, Lenar said.
Michigan would join 18 other states and Washington DC in setting a payday loan interest rate limit of 36% APR or less. Voters in Nebraska, Colorado, South Dakota and Montana passed payday loan rate caps by ballot, all of which received more than 70% voter approval.
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