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 have dubbed this monstrosity the “Michigan Payday Loan Interest Rate Cap Initiative,” which would likely put Michigan lenders out of business, hurting working-class Michigan residents in the process.
To understand the damage this would cause, one must understand the people using these products. Payday loans and other short-term loans are small parts of our financial system that help consumers who have seasonal income or don’t 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 are forced to resort to more expensive options such as payday or auto title loans, unfunded check fees, or non-payment of bills. Consumers are in this position for a variety of reasons, but the sub-banks are often young people, recent immigrants, single parents and minorities.
Many of the products available to underbanked consumers (including underfunded and short-term loan fees) have been criticized as expensive, in part because of their high annual percentage rate (APR). The problem with APR is that bad check and payday loan fees 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, let alone a year or more, so the whole concept of judging them by their APR is not only absurd, it’s but it also hides the true cost of these products.
Think about it: if Aunt Ronda lends you $100 today and you pay her $101 tomorrow after your paycheck hits, that would be a good deal for you, right? You could avoid overdrafting your account or bouncing some checks. That $1 could save you hundreds in bank fees.
Not according to the Michigan Group: According to their vision, your affordable short-term loan will bear an APR of 365%. Suddenly sweet old Aunt Ronda is a loan shark.
We don’t have to speculate about what will happen in Michigan if this law is passed: After Oregon passed an interest rate cap, overdraft fees and late bill payments increased, while the overall financial health of Oregon residents improved declined.
In Georgia, a rate cap led to this increases in bankruptcy rates, bounced checks, and complaints to the Federal Trade Commission. And a 2018 World Bank study found that interest rate caps led to negative side effects, including the loss of credit options for many underbanked consumers.
Michigan residents are rightly thinking creatively about how to address the plight of consumers who are financially marginalized. 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.
Therefore, a policy designed to ‘protect’ a few irresponsible or unfortunate consumers from themselves would likely harm many more consumers, pushing them to use less affordable alternatives.
Short-term loans are a cheap and attractive form of credit in times of the financial crisis. If you think Michigan residents should avoid putting your neighbors in unsustainable financial situations, and you see a rate cap question on the ballot next year, you should vote no.
And before that, if you’re asked to sign a petition regarding a rate cap, you should decline the request.
Kent Kaiser is Secretary/Treasurer of Domestic Policy Caucus, whose mission is to support transparent, public conversations about important policy issues at the local, state, and federal levels, educate voters on the issues that will have the greatest impact on their community, and help community members work with elected officials critical political matters.