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 named this monstrosity the “Michigan Payday Loan Interest Rate Cap Initiative,” which would likely drive Michigan lenders out of business, hurting working-class Michigan residents.
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 do not have access to emergency funds, such as savings accounts, bank loans, home equity loans and 401(k) loans.
Without these resources in the event of a financial emergency, these “underbanked” consumers must resort to more expensive options such as payday or auto title loans, NSF check fees, or nonpayment. 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 products available to underbanked consumers (including insufficient funds 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 NSF fees and payday loans don’t last a year.
When people take out these loans, their intention is to pay them back in days or weeks, not months and certainly not a year or more, so the very concept of judging them based on their annual percentage rate is not not only absurd, 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 is paid, that would be a good deal for you, right? You could avoid overdrafting or bouncing checks. That $1 could save you hundreds in bank charges.
Not according to the Michigan group: according to their view, your affordable short-term loan carries 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 late bill payments increased while the overall financial situation of Oregon residents has declined.
In Georgia, a price cap led to higher rates of bankruptcy, bad checks and Federal Trade Commission complaints. And a 2018 World Bank study found that rate caps lead to 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 happy with the products they use and use them responsibly.
Thus, a policy meant to “protect” a few irresponsible or unhappy consumers from themselves would likely harm many more consumers and drive 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 your neighbors into untenable financial situations, and you find a rate cap issue on the ballot next year, you should vote “no” on it.
And before that, if you are asked to sign a petition regarding a price cap, you must refuse 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, to educate voters on the issues that will have the greatest impact on their community, and support community members in their dialogue with elected officials on these critical policy issues.