Opinion: Escaping the debt trap
Michigan House Bill 5097 would “authorize licensed providers of deferred present service transactions to make certain small loans.” In other words, the bill would expand payday lending options for consumers.
Payday loans, short-term, high-cost financial products, have been justifiably criticized as the preferred tool of predatory lenders: a lending option that frequently traps families and individuals in a costly and potentially catastrophic cycle of debt.
Supporters of the bill argue that expanding payday lending options will serve a currently underserved population, that the terms of these loans are clearly conveyed to borrowers, and that it simply makes sense to provide those who are ostensibly already seeking out larger, unregulated loans online with the freedom to pursue more regulated lending options.
But these arguments gloss over some of the very real problems with payday lending in general, and with HB 5097 specifically. Framing the discussion as one of expanded “freedom” and new “opportunity” is profoundly misleading. The reality is very different, and the beneficiaries of this legislation — should it pass — would not be consumers, but the lenders who offer these problematic products.
To understand why, we don’t have to look any further than the details of the bill itself, which would allow lenders to charge a monthly service fee of 11% on the principal of a loan, equivalent to an annual percentage rate (APR) of around 132%. In practical terms, this means that a borrower would end up paying more than $7,000 to pay off a $2,500 two-year loan.
And it isn’t just the high rates that are concerning. The legislation states that there would be no limits on the length of these new loans, and expressly allows a consumer to use one of these "small” loans to pay off a deferred presentment loan — and even allows borrowers to renew a loan after they've made 30% of the payments. Consequently, borrowers could conceivably be caught in this debt trap indefinitely.
That’s not an opportunity, that’s a liability. And it’s the exact opposite of freedom.
From a big-picture perspective, it’s reasonable to wonder why there is any need to offer yet another product that could potentially trap vulnerable borrowers in a cycle of debt. In Michigan, 70% of payday loans are taken out the same day as a previous loan is repaid, 91% of Michigan borrowers take out another loan within 60 days, and 75% of payday lenders’ revenue comes from borrowers caught in more than 10 loans per year.
Negative consequences from this type of lending is not limited to consumers — entrepreneurs and small business leaders often find themselves on the “hamster wheel” of debt facilitated by payday loan lenders.
Payday lenders in Michigan (the vast majority of which are actually headquartered out-of-state) already siphon more than $103 million in fees annually, a financial drain that not only harms families and individuals, but hampers asset-building and economic opportunity more broadly. Payday lending facilities in Michigan are disproportionately located in rural areas, lower-income communities, and communities of color. Saddling those vulnerable communities with additional burdens like increased overdraft fees, bill payment delinquencies, involuntary bank account loss, and even bankruptcy isn’t just bad fiscal policy, it’s deeply irresponsible — and even morally questionable.
Finally, it is important to note that this bill, in addition to its many flaws, is entirely redundant. There is already legislation governing small loans in Michigan: The Michigan Regulatory Loan Act and the Credit Reform Act. The first licenses lenders, and the second prohibits these lenders from charging more than 25% interest per year. Proposing a bill under the Deferred Presentment Act is an attempt to allow the payday lending industry to gain an unfair advantage by getting around the interest cap that other small loan providers are required to abide by in Michigan.
Michigan should not further expose consumers to a debt-trap business model that would constitute another form of financial abuse.
Consumers should have the power to make their own choices, but Michigan lawmakers should not authorize the sale of clearly predatory products. Michigan’s working families need access to safe, affordable options — not to be trapped in high-cost loans that are nearly impossible to escape.
David A. Snodgrass is president & CEO of Lake Trust Credit Union.