The Michigan Prospect

TAKING AWAY CONSUMER PROTECTION

Acting under the authority of

Acting under the authority of the state consumer protection law, Michigan Attorney General Jennifer Granholm is pursuing gasoline stations that substantially raised their prices at the pump in the wake of the September 11 terrorist attacks. Is she on the right track, and is this a proper function of state government? Lynn Jondahl explores this question in this op-ed for the October 31, 2001 edition of the MIRS newsletter...

Payday Loans

From the 2003 Michigan Prospect briefing book "New Governance for the People of Michigan"

by Laura Polachek
State Policy Analyst, AARP Michigan

Payday loans are single-payment short-term small loans based on personal checks that go by a variety of names, including “deferred presentment,” “deferred deposit,” “cash advance,” or “check loans.” It differs from check-cashing in that it is a lending process. The consumer presents the payday lender1 with a check drawn on his or her own account, as opposed to a check that he or she wants to cash. In a typical payday loan, the consumer writes a check for the amount to be borrowed plus a fee, which is a percentage of the loan amount (such as $15 per $100 borrowed). These loans are usually for a few hundred dollars, or to make ends meet under “payday.” The lender agrees not to deposit the check for the loan term, which is typically up to 14 days. When the loan is due, the consumer can tell the lender to cash the check, redeem the check for cash, or pay another fee to extend the loan for another two-week period.

A typical loan costs $17.65 to borrow $100 for two weeks, or a 459 percent Annual Percentage Rate (APR). Because many consumers cannot afford to repay the loan during the initial loan period, they must “roll it over” and pay another fee just to extend the loan period (after all, if you are so desperate for cash you will pay $30 for a $200 payday loan, you probably will not have $230 to pay it back when it becomes due two weeks later). In fact, the average rollover rate is about ten to thirteen times per customer, according to studies conducted by the Illinois, Iowa, and Indiana Departments of Financial Institutions. This means that the interest charges paid on the loan could exceed the loan itself by several times, with the principal still being due.

AARP believes that interest charges of several hundred percentage points a year are usurious, and should be banned. In fact, many states do cap small loans interest charges under their usury laws or small loan acts. In fact, Michigan currently caps permissible interest charges for small loans at 25 percent APR. Payday loan legislation often authorizes, at minimum, $15 charge per $100 lent, which would inflate the permissible rate to 390 percent, or more than ten times the current limit. Payday lenders say that this rate is necessary to make a profit for loans of such a short duration, and that they are filling a desperate need for credit in underserved communities. However, AARP does not believe that unreasonably short loan terms justify the usurious rates that are charged for these products, and that in fact such loans only create more unaffordable debt for the consumer.