Hospital bills, car repairs, and other sudden expenses can hit hard, especially for those struggling to make ends meet. Family stress is often heightened when unforeseen bills arrive before a paycheck. In this scenario, some turn to high-interest, short-term loans to cover the extra bills. These are called payday loans. To receive funds on the spot, a borrower typically writes a postdated check or allows for a bank withdrawal once a paycheck or other income is received. Michiganders can obtain payday loans at a maximum rate of $600 per lender—up two at any given time—with a maximum term of thirty-one days.
Unfortunately, payday loans tend to exacerbate, not lessen, financial stress on a person or a family.
The payday lending industry says it wants to offer a quick fix for financial emergencies, especially for those unable to receive a traditional loan. The statistics, however, paint a different picture. High interest rates make payday loans difficult to repay, especially without borrowing additional funds or defaulting on other expenses. Data from the federal Consumer Financial Protection Bureau reveals over seventy percent of borrowers take out another loan the same day they pay off the first one. Additionally, the data reveals more individuals rely on payday loans to meet regular needs, not simply to cover a one-time hardship.
Behind these statistics are real Michigan residents striving to get by, struggling in situations often made more challenging by the “assistance” of payday loans. Despite the dangerous cycle of such lending practices, support has risen in the Michigan House of Representatives to expand payday lending.
House Bill 5097, sponsored by Representative Brandt Iden (R-Oshtemo Township), would allow payday lenders to offer loans of up to $2,500. The legislation does not provide adequate consumer protections but instead charges borrowers an unreasonable 132 annual percentage rate (APR,) or eleven percent interest rate per month. The fees the industry is proposing to charge are out of the mainstream: for example, federal law limits the annual percentage rate on payday loans for those in the military to thirty-six percent APR, recognizing the stress a higher rate could cause on families serving this nation.
In addition, the proposed legislation does not require borrower payments to be put towards the principal of the loan. While the most recent version of the bill does include consideration of an individual’s “reasonable financial ability” to repay what they borrow, the draft proposal is not strong enough to ensure adequate consideration will be given. Instead, the expansion will likely cause more Michigan families to become trapped in a cycle of debt.
During the 2019–2020 legislative session, Michigan Catholic Conference has worked alongside other anti-poverty organizations to oppose the expansion of payday lending in Michigan. The Catholic Church teaches it is wrong to take advantage of or to exploit a person’s distress, as payday loans do. In fact, the Catechism states “any form of unjustly taking and keeping the property of others is against the seventh commandment: thus…forcing up prices by taking advantage of the ignorance or hardship of another” (2409).
Instead of expanding payday loans, communities should consider initiatives to improve financial literacy and to address poverty, such as the St. Vincent de Paul Society’s micro-loan efforts. This program provides loans of up to $750 for eighteen months—with a three percent interest rate—and requires borrowers to work with a trained financial mentor. The mentor teaches participants how to build personal credit and to improve their financial situation. Rather than trapping individuals in debt, the micro-loans provide education and hope for a better future.
In a time of need, solutions such as financial literacy and low-interest borrowing do more to uphold the dignity of the human person than high interest lending. Legislative efforts should focus on solutions that respect individual persons, not expand predatory payday loans.
Note: Learn more about the current status of House Bill 5097 and how you can urge your elected officials to oppose the bill.