Dave Adams: Payday Lenders and a Future Without Them

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Can you name the industry that has more storefronts nationwide than McDonald’s and Starbucks? The answer may surprise you: it is the payday loan industry.

In Michigan, nearly 600 payday loan stores each issue about 3,000 loans per year, generating $ 935 million in annual revenue statewide.

This money is expensive for consumers like Kathy from Lansing. Medical bills and a disabled partner left her in need of the extra money. She went to the only place she thought she could give him a loan: a payday lender. It was a decision she would regret for years.

The payday lender gave Kathy a loan that charged an annual interest rate of over 300%. When her loan payment was due, she couldn’t pay it. So Kathy took out another loan, going into even more debt.

This type of cyclical loan is at the heart of the business model of payday lenders. According to most recent statistics available for Michigan from the Center for Responsible Lending77 percent of payday loans go to those who have received at least 12 previous loans.

Two years after taking the loan and thousands of dollars in fees later, Kathy had done nothing to repay the original loan.

State law limits the amount a person can borrow from a payday lender to $ 600 over a 31-day period, with fees capped at $ 76; when it is annualized, this can amount to 391%.

Yet payday lenders want more.

During the 2013-2014 legislative session, two bills were introduced to expand payday lending power in Michigan. A bill would have allowed pawn shops to grant securities loans that would have required borrowers to pay a monthly user fee of 20 percent as well as the currently legal 3 percent monthly interest rate. This means that if someone took out a loan of $ 1,000, a year from now they would be paying $ 2,760 just in interest charges, almost triple the loan amount.

A second invoice 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% on top of the 5% processing fee already authorized . The result would have equaled an annual percentage of almost 200%.

Through the work of a statewide coalition comprising the Michigan League of Credit Unions and the Michigan Community Economic Development Association (CEDAM), neither of the two laws has been approved.

However, legislation expanding the power of payday lending is expected to resurface.

Our goal, however, should not be just to prevent the expansion of payday loans. A bigger goal is to equip Michigan residents with the tools they need to manage their finances so they don’t need to go to a payday lender no matter how much money they earn.

It has to start when consumers are young.

Michigan law which allows high school students to take a financial literacy course to meet the math requirements for graduation will go into effect in February of this year.

Credit unions across the state offer strong financial education programs, including the operation of more than 300 student-run school branches, reaching nearly 50,000 students – the largest number in the country – across approximately 2,000 financial education presentations in 2014-15. In addition, credit unions have led 21 reality shows for teens, which give students a real-world budgeting experience through hands-on simulations.

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

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

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

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