Payday loan rate caps are bad news for those in need

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Late last year, the so-called “Michiganders for Fair Lending” launched a voting initiative that would do anything but make lending fairer in Michigan. They called the monstrosity the Michigan Payday Loan Interest Rate Cap Initiative, which would likely bankrupt Michigan lenders, harming working-class residents of Michigan.

To understand the harm this would cause, one must understand the people who use these products. Payday loans and other short-term loans are small parts of our financial system that help consumers who have seasonal incomes or who do not have access to emergency funds, such as savings accounts, bank loans, home equity loans and 401 (k) loans.

Lacking these resources during financial emergencies, these “underbanked” consumers must resort to more expensive options such as payday or auto title loans, bad check fees or non-payment of bills. Consumers find themselves in this situation for a variety of reasons, but the underbanked are often young people, recent immigrants, single parents and minorities.

Many products available to underbanked consumers (including insufficient fund fees and short-term loans) are criticized for their high cost, in part because of their high Annual Percentage Rates (APRs). The problem with APR is that bad check fees and payday loans don’t last for a year.

When people take out these loans, their intention is to pay them back in days or weeks, not months and certainly not in a year or more, so the whole concept of judging them on the basis of their annual percentage rate is not. not only absurd, but it also masks the real cost of these products.

Think about it: If Aunt Ronda loans you $ 100 today and you pay her $ 101 tomorrow after your paycheck arrives, that would be a good deal for you, wouldn’t it? You could avoid going overdrawn or bouncing some checks. That $ 1 could save you hundreds of bank charges.

Not according to the Michigan group: Their view is that your affordable short-term loan has an APR of 365%. Suddenly, sweet old Aunt Ronda is a loan shark.

We don’t need to guess what will happen in Michigan if this law passes: After Oregon passed a rate cap, bank overdraft fees and bill payment delays increased as the overall financial situation of Oregon residents decreases.

In Georgia, a rate cap led to increases bankruptcy rates, bad checks and complaints to the Federal Trade Commission. And a 2018 World Bank Study found that ceiling rates had negative side effects, including the loss of credit options for many underbanked consumers.

Michigan residents are right to think creatively about how to address the plight of consumers who are financially on the margins. Underbanked consumers earn less and save less, on average. However, the majority of these consumers are also satisfied with the products they use and use them responsibly.

Thus, a policy that aims to “protect” a few irresponsible or self-unhappy consumers would likely harm many more consumers and push them to use less affordable alternatives.

Short-term loans are an affordable and attractive form of credit in times of financial crisis. If you think Michigan residents should avoid pushing their neighbors into untenable financial situations and find a question about the rate cap on the ballot next year, you should vote “no”.

And before that, if you are asked to sign a petition regarding a rate cap, you must deny the request.

Kent Kaiser is Secretary / Treasurer of the Domestic Policy Caucus, whose mission is to support transparent public conversations on crucial political issues at the local, state and federal levels, to educate voters on the issues that will have the greatest impact on their community, and to support community members in their dialogue with elected officials on these critical political issues.

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