Michigan lawmakers advance bills to combat ‘predatory’ payday loans

Legislation approved in the state Senate would protect Michigan workers by capping the annual percentage rate for payday loans at 36%. State lawmakers said the long-sought reforms will help prevent families from spiraling into debt.

MICHIGAN— Two bills passed in the state Senate this week aim to fix an exploitative system of payday lending that has trapped thousands of Michiganders in a cycle of perpetual debt.

Senate Bill 632 and House Bill 4343, passed by the Senate on Thursday, would put a new interest rate cap of 36% on all payday loans in Michigan, inclusive of all loan service fees.

The main idea, lawmakers have said, is to drastically curb the cost of loan repayment for Michiganders who have been trapped in perpetual debt due to the “predatory” structure of the loans—particularly in Black and brown communities often targeted by payday lending shops.

“Combatting predatory payday lending practices protects our communities from financial vulnerability and generational debt,” said state Sen. Sarah Anthony (D-Lansing). “At the end of the day, financial prosperity is especially important  as we work to help all Michiganders thrive.”

Despite opposition from Republican lawmakers, both bills passed in the state Senate this week and are now en route to the state House for final approval before they can be signed into law.

“This long-awaited change is one step closer to becoming law thanks to the efforts of my Senate colleagues and the ongoing advocacy from stakeholders and impacted residents,” Anthony said.

What’s a payday loan?

A payday loan is a short-term, high-cost agreement where Michigan workers can quickly borrow up to $600 ahead of their next paycheck, typically to cover emergencies and other unexpected expenses—like an unforeseen medical bill, replacing an appliance, or repairing a vehicle.

They’re also frequently advertised as “cash advance” loans. 

Michiganders either grant lenders direct access to their bank accounts, or write them a personal check for the amount borrowed, plus a service fee that is capped by state law at 11-15% of the loan. Full repayment (including the service fee) is typically required by their next payday. 

What’s the problem?

Two-week repayment schedules and high fees on those loans translate to triple-digit annual percentage rates (APRs) and unaffordable payments that have sent thousands of Michiganders spiraling into a cycle of debt that siphons about $1 million out of the state’s economy every year. 

For example:

A two-week loan of $100 that includes the state’s maximum allowable service fee of $15 would carry an APR of more than 390%—along with the possibility of added fees for checking customer eligibility. A $600 loan would translate to a 330% APR, including the maximum fees.

And with nothing in state law to stop lenders from stringing loans together so that Michiganders can just pay off their existing loan with a fresh one, Anthony said the system has created an “exploitative” cycle of service fees and perpetual debt.

“This industry markets loans as short term, but by design they trap the vast majority of borrowers in a cycle of debt that, more often than not, results in bankruptcy,” Anthony said last year. “We have heard too many stories in our communities—like right here in Lansing, and across the state—that we must act now to address these predatory practices.”

Federal estimates show that about 70% of Michiganders who utilize payday loans will take out another loan on the same day they’ve repaid one, MLive reports. In 2016, roughly 91% of Michigan borrowers also returned for another loan within two months of paying off their last one.

Studies show that people who use payday lenders are far more likely to file for bankruptcy. And Anthony said the vast majority of payday lenders in Michigan are also located in predominantly Black and brown communities, and focus most of their advertisements in those communities.

“This is by design. This is what makes this system so exploitative,” she said.

State lawmakers also said that most of Michigan’s payday lenders are based in other states and collect more than $1 million a year in fees that would otherwise stay in Michiganders’ pockets.

What’s the plan?

The legislation approved this week in the Senate would put a new APR cap on payday loans of 36%—which would include all service fees, and serve to drastically reduce repayment costs.

According to the Center for Responsible Lending, the 36% cap—which has already been enacted in at least 18 other states—would lower the cost of repayment so significantly that Michiganders would essentially be protected from spiraling into debt through payday loans.

Beyond citing the importance of having “clear, bright lines” for borrowers and lenders, the National Consumer Law Center also bills the 36% mark as the dividing line between affordable small-dollar loans and unaffordable, potentially predatory ones. The structure also encourages lenders to offer longer installment loans with more affordable payments and an honest term.

Support for capping payday loans at 36% has also reportedly drawn wide, bipartisan support in the states where the reforms have been enacted—and they’ve since led to a total consumer savings of more than $2.2 billion annually, according to the Michigan League for Public Policy.

“Michigan Senate Democrats took a vital step toward reining in predatory payday loan practices to protect Michiganders and their families,” said Michigan Democratic Party Chairwoman Lavora Barnes, in a statement. “By capping interest rates, we are protecting families and individuals from the most exploitative behavior of these predatory lenders.”

READ MORE: Bills seek to provide Michiganders with paid family and medical leave

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