Opinion: Capping payday loan rates is bad news for those who need them
Late last year, the so-called "Michiganders for Fair Lending" launched a ballot initiative that would do anything but make lending fairer in Michigan. They’ve named this monstrosity the “Michigan Payday Loan Interest Rate Cap Initiative,” which would likely drive Michigan lenders out of business, harming working-class Michigan residents in the process.
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 income or who don’t have access to emergency funds, such as savings accounts, loans from banks, 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, bounced check fees or nonpayment of bills. Consumers find themselves in this position for a variety of reasons, but the underbanked are often young people, recent immigrants, single parents and minorities.
Many of the products available to underbanked consumers (including non-sufficient funds fees and short-term loans) are criticized for being expensive, in part because of their high annual percentage rates (APR). The problem with APR is that bounced 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 a matter of days or weeks, not months and certainly not a year or more, so the whole concept of judging them based on their annual percentage rate is not only absurd, but it also conceals the true cost of these products.
Think about it: If Aunt Ronda loans you $100 today and you pay her $101 tomorrow after your paycheck hits, that would be a good deal for you, right? You might avoid overdrawing your account or bouncing some checks. That $1 could save you hundreds in bank fees.
Not according to the Michigan group: Under their vision, your affordable short-term loan carries a 365% APR. Suddenly, sweet old Aunt Ronda is a loan shark.
We don’t need to guess about what will happen in Michigan if this law passes: After Oregon passed a rate cap, bank overdraft fees and late bill payments increased while the overall financial condition of Oregon residents declined.
In Georgia, a rate cap led to increases in bankruptcy rates, bounced checks and complaints to the Federal Trade Commission. And a 2018 World Bank study found that rate caps led to negative side effects, including the loss of credit options for many underbanked consumers.
Michigan residents are correct 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. The majority of these consumers, however, are also satisfied with the products they use and use them responsibly.
Thus a policy that is meant to “protect” a few irresponsible or unfortunate consumers from themselves would likely harm substantially more consumers and push them to use less affordable alternatives.
Short-term loans are an affordable and attractive form of credit during times of financial crisis. If you believe Michigan residents should avoid pushing your neighbors into untenable financial situations and you find a rate cap question on the ballot next year, you should vote “no” on it.
And before that, if you are asked to sign a petition regarding a rate cap, you should decline the request.
Kent Kaiser is secretary/treasurer of the Domestic Policy Caucus, whose mission is to support transparent, public conversations on critical policy issues at the local, state and federal levels, educate voters on the issues that will have the greatest impact on their community, and support community members as they engage with elected officials on these critical policy matters.