Pay Day Loans
On October 10, 2019 a bill was introduced in the Michigan House to allow the expansion of payday lending products offered in the state. The bill, HB 5097, would allow “small dollar” loans of up to $2,500 with fees of 11% monthly on the principal of the loan. The fees on a loan are equivalent to 132% APR.
As it is currently written, the legislation does not limit the length of the loan, and would allow borrowers of shorter-term payday loans to pay those off with the “small dollar” loan. It would also allow borrowers to re-borrow after making only 30% of the payments on the loan.
These loans are marketed as a quick financial fix, but are instead a long-term debt trap for borrowers. At its core, loans authorized under HB 5097 are payday loans with excessive rates that will last months, or even years. Payday lenders will still get access to the borrower’s bank account and have no regard to whether the loan is affordable or not.
- The bill advanced out of the House Regulatory Reform committee and was referred to the House Ways and Means committee on Tuesday, December 10. Please contact committee members and let them know your opposition to the bills. A committee roster and contact information is available here.
- Reach out to your Representative and let them know you oppose the bill. You can find your representative here, and contact information for all representatives is available here. The House of Representatives will be on break from December 16 – January 9, and many representatives will be in their districts conducting coffee hours. That information can be found by calling their office or looking on their web page. Coffee hours are a great way to speak to your legislators.
CEDAM has put together talking points about HB 5097 to assist you in conversations with your representative.
Join the Coalition
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.
- If you are interested in joining the coalition, please fill out this form.
- For more information contact Jessica AcMoody or Orletta Caldwell.
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.