Pay Day Loans

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For the past three legislative sessions, the payday lending industry has attempted to expand payday lending options in Michigan. In response, CEDAM has convened the Michigan Coalition for Responsible Lending (MCRL) to fight expansion efforts and to join 16 other states in instituting a rate cap on payday lending.

What is a payday loan?

Payday loans are loans usually of less than $1,000 that have to be repaid within two weeks. Payday lenders charge high fees for these loans that equate to 200-400% interest or more. For comparison, credit card interest rates are 12-30%. In Michigan, lenders can charge 15% on the first $100 borrowed, 14% on the second $100, 13% on the third $100 and so on. This structure creates fees equivalent to triple digit interest rates on payday loans.

Why are payday loans a problem?

Payday lenders are legally allowed to exploit people in desperate situations, offering them a quick fix to short-term financial needs such as bills, groceries and other expenses. Although the financial needs may be short-term, the consequences of payday loans are long-term. Lenders are not held accountable for giving out loans to people who cannot afford to pay them back. The Center For Responsible Lending reported that lenders have drained over $513 million in five years out of Michigan. Additionally, payday lenders disproportionately position themselves near communities of color and low-income and rural communities.

Lenders are allowed to charge upwards of 2.5 times as much as they lend in fees alone. The difficulty in paying back loans leads consumers to “roll over”, borrowing more loans to pay back their previous loans with no cooling-off period in between. The Consumer Financial Protection Bureau (CFPB) reports that 70% of loans in Michigan are taken out on the same day previous loans are paid. This business model is reliant on trapping people in a cycle of debt.

Payday lending is such a pervasive problem that it has been outlawed in some states. So far, 16 states plus DC have implemented interest rate caps of 36% or less on payday loans in order to promote responsible lending.