Would you take out a loan if you knew it carried a 400% interest rate? Most likely not.
But in Michigan that is what payday lenders offer to unsuspecting individuals in need of quick access to cash, who then get trapped in a devastating cycle of debt as they resort to taking out more high-interest payday loans to pay off existing ones.
Payday loans are marketed as a solution for people who need short-term help. A customer can borrow up to $600 and must repay it by their next paycheck, plus a service fee. The listed service fees may seem reasonable, but they amount to an exorbitant amount of interest.
In Michigan, individuals who take out a payday loan of $500 are charged a $65 service fee and must repay it in two weeks, which amounts to an annual percentage rate (APR) of 388%. Credit cards typically range in APR from about 20% to 30%.
The high-cost, short-term nature of these loans makes it difficult for borrowers to repay them. This often leads to the borrower taking on more debt, such as another payday loan to pay off the previous one. The data bear this out — 70% of payday loan borrowers take out another loan the same day one is paid, and 90% take out another one within 60 days.
These debt traps hurt people who are already struggling to make ends meet. Most payday loans are taken out by people in or near poverty, and payday lenders often target low-income neighborhoods for their storefronts.
The predatory nature of payday loans and their impact on the poor are why the Michigan Catholic Conference has been engaged in advocacy at the state Capitol for many years to curb the industry’s expansion. In past legislative sessions, the MCC was successful in stopping legislation from becoming law that would have increased the dollar amount on the loans.
This session marks a new opportunity to pass laws to better protect payday loan users. The MCC has been supporting Senate Bill 632, which would cap the interest rate for payday loans at 36%, a dramatic improvement over the sometimes 400% on these loans. There is bipartisan support for the bill.
In addition to advancing policies to combat these predatory practices, the MCC continues to promote alternatives to payday loans available across the state that accomplish the same purpose but charge less interest. These small-dollar loans are available at major banks, credit unions, and charitable organizations.
Church teaching is opposed to unjust business practices that prey on the poor and vulnerable, and both Pope Francis and Pope Benedict XVI have spoken out against the sin of usury, which is the charging of excessive interest rates.
Our less fortunate brothers and sisters deserve better than to be taken advantage of in their need, which is why the MCC is engaged on policies such as these to recognize and uphold the dignity of the poor and the vulnerable.
Paul A. Long is president and CEO of the Michigan Catholic Conference, the official public policy voice of the Catholic Church in this state.
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