David A. Snodgrass, guest writer
Payday loans – a short-term, high-cost financial product – have been rightly criticized as the preferred tool of predatory lenders; a loan option that frequently traps families and individuals in a costly and potentially catastrophic cycle of debt.
Michigan HB 5097 supporters argue that the expansion of payday loan options will serve a currently underserved population, that the terms of these loans are clearly communicated to borrowers, and that it just makes sense to provide those who are already looking. larger, unregulated loans. online with the freedom to research more regulated loan options.
But these arguments obscure some of the very real issues with payday loans in general, and with HB 5097 in particular. Framing the discussion as one of expanded “freedom” and a new “opportunity” is deeply misleading. The beneficiaries of this legislation if passed would not be the consumers, but the lenders who offer these problematic products.
HB 5097 would allow lenders to charge a monthly service fee of 11% on the principal of a loan, equivalent to an annual percentage rate (APR) of around 132%. Concretely, this means that a borrower would end up paying more than $ 7,000 to repay a loan of $ 2,500 over two years.
And it’s not just the high rates that are of concern.
The law says there would be no limit on how long these new loans last, and expressly allows a consumer to use any of these “small” loans to pay off a deferred loan – and even allows borrowers to renew a loan after making 30% of payments.
As a result, borrowers could be caught in this debt trap indefinitely. It’s not an opportunity – it’s a responsibility. And it is exactly the opposite of freedom.
From a global perspective, it is reasonable to ask why there is a need to offer another product that could potentially trap vulnerable borrowers in a cycle of indebtedness.
In Michigan, 70% of payday loans are taken out the same day a previous loan is paid off, 91% of Michigan borrowers take out another loan within 60 days, and 75% of payday lenders’ income comes from borrowers caught in the loan. more than 10 loans per year.
The negative consequences of this type of loan are not limited to consumers – entrepreneurs and small business executives often find themselves on the hamster wheel of debt facilitated by payday lenders.
Michigan payday lenders (the vast majority of whom are in fact headquartered out of state) are already siphoning off more than $ 103 million in fees a year, a financial drain that not only hurts families and individuals, but hinders asset building and economic opportunities more broadly. .
Payday loan facilities in Michigan are disproportionately located in rural areas, low income communities, and communities of color.
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Finally, it is important to note that this bill, in addition to its many flaws, is entirely redundant. There is already legislation governing small loans in Michigan: the Michigan Regulatory Loan Act and the Credit Reform Act.
The first allows lenders and the second prohibits these lenders from charging more than 25% interest per year. Proposing a bill under the Deferred Presentment Act is an attempt to allow the payday lending industry to gain an unfair advantage by bypassing the interest cap that other small loan providers are required to meet in Michigan. .
For these reasons, Lake Trust Credit Union has joined the Michigan Coalition for Responsible Lending – a broad body of local and state financial, civic and community organizations – in calling on the Michigan legislature to reject this potentially damaging legislation.
Together, we stand up to say that Michigan lawmakers should not further expose consumers to a debt trap business model that constitutes another form of financial abuse. Collectively, we feel obligated to shine a light on the appalling practices of payday lenders in our state and we are committed to making this issue a priority for all of our stakeholders.
David A. Snodgrass is President and CEO of Lake Trust Credit Union.