Payday lenders, and a future without them

Can you name the industry that boasts more storefronts nationwide than McDonalds and Starbucks? The answer may surprise you – it’s the payday lending industry.

In Michigan, close to 600 payday lending storefronts each issue about 3,000 loans per year, generating $935 million in annual revenue statewide.

That money comes at a high cost to consumers such as Kathy from Lansing. Medical bills and a disabled partner left her needing extra cash. She went to the only place she thought would give her a loan– a payday lender. It was a decision she would regret for years to come.

The payday lender gave Kathy a loan with fees that equated to an annual percentage rate of more than 300 percent. When her loan payment was due, she couldn’t pay it. So, Kathy took out another loan, digging herself deeper in debt.

This type of cyclical lending lies at the core of the payday lenders’ business model. According to the most recent statistics available for Michigan from the Center for Responsible Lending, 77 percent of payday loans are issued to those who’ve received at least 12 prior loans.

Two years after taking out the loan and thousands of dollars in fees later, Kathy hadn’t made a dent in paying back the original loan.

State law limits the amount a person can borrow from a payday lender to $600 within a 31-day period, with fees capped at $76; when annualized, that can equate to 391 percent.

Still, payday lenders want more.

During the 2013-2014 legislative session, two bills were introduced to expand payday lending authority in Michigan. One bill would have allowed pawn brokers to make title loans that would have required borrowers to pay a 20-percent monthly usage fee along with the currently legal 3 percent monthly interest rate. This means if someone took out a $1,000 loan, in a year he or she would pay $2,760 just in interest in fees – close to triple the amount of the loan.

A second bill would have allowed payday lenders to offer longer-term, higher dollar loans allowing the lender to charge a monthly account service fee of up to 9.75 percent on top of a 5 percent processing fee already allowed. The result would have equaled an annual percentage rate of close to 200 percent.

Through the work of a statewide coalition including the Michigan Credit Union League and the Community Economic Development Association of Michigan (CEDAM), neither piece of legislation was approved.

However, legislation expanding payday lending authority is expected to resurface.

Our goal, though, shouldn’t solely rest on preventing the expansion of payday lending. A loftier objective is to equip Michigan residents with the tools they need to manage their finances so they won’t need to go to a payday lender, no matter the amount they earn.

This needs to start when consumers are young.

A Michigan law which allows high school students to take a financial literacy class to help meet the math requirement mandated for graduation will go into effect in February of this year.

Credit unions across the state offer robust financial education programs including implementing more than 300 in-school, student-run branches reaching nearly 50,000 students – the largest number in the nation – through approximately 2,000 financial education presentations during 2014-2015. In addition, credit unions conducted 21 teen reality fairs, which provide students with real world budgeting experience through hands-on simulations.

As for Kathy, she escaped the payday lending cycle with the help of Lake Trust Credit Union, which offered her a loan and monthly payment that was less than half what she was paying before. Twenty-six other Michigan credit unions offer specific payday loan alternatives.

You can play a role in Michigan’s financial literacy by telling your legislators to vote no on payday lending authority expansion. You can also check out financial education opportunities available at places such as credit unions, attend community events including Show Me the Money Day, and by investigating reputable financial institutions if you need emergency cash.

As a state, let’s become so financially savvy that an industry which preys on desperation and a lack of information can’t make a profit here.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Comments

BigDCvx
Thu, 01/28/2016 - 10:05am
Wow! Cool! ...no new big government program! Kudos. CUs are taking a big risk on folks too ignorant to avoid the sharks. Education is the key. I wonder who it is who sponsors legislation relaxing the limits on this predatory practice.
Thu, 01/28/2016 - 10:28am
Wonder why our rich elected officials support it. They don't care about those less fortunate than themselves.
Mrs A
Sun, 01/31/2016 - 6:35pm
BigDCvx - why the presumption that people forced to go to the loan sharks are "ignorant"? How about "desperate" and "impoverished" with no established credit record and no credit union/banking option available.The name-calling and negative labeling is mean-spirited.
matt
Thu, 01/28/2016 - 10:38am
There's no question these loans are a bad financial move for the borrower and I am sure that they're in tough straits to begin with. But I am confused here, Big DCvx, how are CUs taking a big risk on anyone, especially these people? Seems they (CUs) just want to offer the same pat meaningless answer - MORE EDUCATION! Problem is the people who use this industry aren't in your classes and probably never will be. I deal with similar situations every day. As is said, talk is cheap, so why aren't you out there making loans at what you consider a more reasonable rate? Seems that you just don't want anyone else to make loans to these people either. Put your money where your mouth is!
Peter
Thu, 01/28/2016 - 12:32pm
Matt, this is from the article: As for Kathy, she escaped the payday lending cycle with the help of Lake Trust Credit Union, which offered her a loan and monthly payment that was less than half what she was paying before. Twenty-six other Michigan credit unions offer specific payday loan alternatives.
Charles Richards
Thu, 01/28/2016 - 4:13pm
If loans at reasonable rates are so readily available from credit unions, why are people borrowing money from payday lenders?
Matt
Thu, 01/28/2016 - 5:26pm
You are correct, I missed that! Still have to wonder how this got so big if banks and CU were willing to make small loans to less than perfect borrowers? More the exception than the rule?
Rich
Thu, 01/28/2016 - 11:49am
I wonder what the default rate is on payday loans?
Jeff
Thu, 01/28/2016 - 4:00pm
Link showed name of sponsor of each bill. It appears both were in 2014. First was Randy Richardville, second was Lisa Lyons. But it would be useful to make it easy for readers to find complete list of legislators who co-sponsored or voted to approve these bills. We need to let our legislators know that being "pro-business" does NOT mean permitting abuses like these.
R.L.
Thu, 01/28/2016 - 5:41pm
They are the blood sucking parasites that prey on the least of those who can afford it at any rate. They give loan sharking a bad name. Join forces with the lotto industry and you have a winning team. Better yet go with buy here pay here car lots, and own to rent places. God have mercy on the poor. Blessed are the poor for they shall inherit the earth. Peace R.L.
David W
Fri, 01/29/2016 - 9:34am
Interesting... pay day lending. When the mob does it, it is called loan sharking and it is illegal.