Payday lenders, and a future without them

Dave Adams is the CEO of the Lansing-based Michigan Credit Union League and Livonia-based CU Solutions Group.

Can you name the industry that boasts more storefronts nationwide than McDonalds and Starbucks? The answer may surprise you – it’s the payday lending industry.

In Michigan, close to 600 payday lending storefronts each issue about 3,000 loans per year, generating $935 million in annual revenue statewide.

That money comes at a high cost to consumers such as Kathy from Lansing. Medical bills and a disabled partner left her needing extra cash. She went to the only place she thought would give her a loan– a payday lender. It was a decision she would regret for years to come.

The payday lender gave Kathy a loan with fees that equated to an annual percentage rate of more than 300 percent. When her loan payment was due, she couldn’t pay it. So, Kathy took out another loan, digging herself deeper in debt.

This type of cyclical lending lies at the core of the payday lenders’ business model. According to the most recent statistics available for Michigan from the Center for Responsible Lending, 77 percent of payday loans are issued to those who’ve received at least 12 prior loans.

Two years after taking out the loan and thousands of dollars in fees later, Kathy hadn’t made a dent in paying back the original loan.

State law limits the amount a person can borrow from a payday lender to $600 within a 31-day period, with fees capped at $76; when annualized, that can equate to 391 percent.

Still, payday lenders want more.

During the 2013-2014 legislative session, two bills were introduced to expand payday lending authority in Michigan. One bill would have allowed pawn brokers to make title loans that would have required borrowers to pay a 20-percent monthly usage fee along with the currently legal 3 percent monthly interest rate. This means if someone took out a $1,000 loan, in a year he or she would pay $2,760 just in interest in fees – close to triple the amount of the loan.

A second bill would have allowed payday lenders to offer longer-term, higher dollar loans allowing the lender to charge a monthly account service fee of up to 9.75 percent on top of a 5 percent processing fee already allowed. The result would have equaled an annual percentage rate of close to 200 percent.

Through the work of a statewide coalition including the Michigan Credit Union League and the Community Economic Development Association of Michigan (CEDAM), neither piece of legislation was approved.

However, legislation expanding payday lending authority is expected to resurface.

Our goal, though, shouldn’t solely rest on preventing the expansion of payday lending. A loftier objective is to equip Michigan residents with the tools they need to manage their finances so they won’t need to go to a payday lender, no matter the amount they earn.

This needs to start when consumers are young.

A Michigan law which allows high school students to take a financial literacy class to help meet the math requirement mandated for graduation will go into effect in February of this year.

Credit unions across the state offer robust financial education programs including implementing more than 300 in-school, student-run branches reaching nearly 50,000 students – the largest number in the nation – through approximately 2,000 financial education presentations during 2014-2015. In addition, credit unions conducted 21 teen reality fairs, which provide students with real world budgeting experience through hands-on simulations.

As for Kathy, she escaped the payday lending cycle with the help of Lake Trust Credit Union, which offered her a loan and monthly payment that was less than half what she was paying before. Twenty-six other Michigan credit unions offer specific payday loan alternatives.

You can play a role in Michigan’s financial literacy by telling your legislators to vote no on payday lending authority expansion. You can also check out financial education opportunities available at places such as credit unions, attend community events including Show Me the Money Day, and by investigating reputable financial institutions if you need emergency cash.

As a state, let’s become so financially savvy that an industry which preys on desperation and a lack of information can’t make a profit here.