Etchison: Cap interest rates on payday loans to protect Black community

This column appeared in the May 6. 2024, Detroit News.

Senate Bill 632 and House Bill 5290 would cap the interest rate on payday loans at 36% and mark a significant step toward addressing the predatory lending practices that disproportionately harm Black communities. As a longtime financial industry professional and member of the Michigan Black Leadership Advisory Council (BLAC), I strongly support this legislation.

In our 2022 policy recommendation report, BLAC called for Michigan leaders to impose a 36% interest cap for payday loans, recognizing the negative impact payday lenders have on the state’s Black communities. While a 36% interest rate is still higher than what credit unions and banks offer, it represents a significant improvement over the average 391% interest rate charged by payday lenders.

Payday lending operations are mostly concentrated in communities of color and rural areas. While there are 5.6 payday lending stores per 100,000 people in Michigan, that number is 7.6 payday lending stores per 100,000 people in Black communities throughout the state, according to a report by the Center for Responsible Lending.

In our 2022 policy recommendation report, BLAC called for Michigan leaders to impose a 36% interest cap for payday loans, the author writes.

In many cases, payday loans may seem like a quick fix for urgent financial needs. However, the exorbitant interest rates and fees attached to these loans often trap borrowers in a cycle of debt, exacerbating financial instability rather than providing genuine relief. Consumers pay back $390 for every $100 borrowed. In fact, according to the Michigan Credit Union League, the annual percentage rate (APR) of a typical two-week payday loan with a $15 fee per $100 borrowed is 391%.

The Center for Responsible Lending found that 70% of payday loans in Michigan are taken out on the same day a previous loan is paid back, and 86% of payday loans are taken out within two weeks of a previous loan’s payoff. The fact that such a significant portion of payday loans in Michigan are taken out immediately after paying off a previous loan, or within a very short time frame, underscores the cycle of debt many borrowers find themselves trapped in.

And even if borrowers manage to pay off a loan, they don’t get a boost to their credit rating because most payday lenders don’t report to major credit bureaus.

Payday lenders argue that low-income Michiganians won’t have options to pay for life’s emergencies without their operations, but alternatives exist that don’t exploit consumers, such as payday alternative loans (PALS) from credit unions and small dollar loans from Community Development Financial Institutions (CDFIs). Some nonprofits and churches also offer creative loan solutions that don’t charge outrageous fees and interest rates.

The focus on offering affordable loans and financial literacy programs can help individuals break free from the cycle of predatory lending.

Senate Bill 632 and House Bill 5290, sponsored by Sen. Sarah Anthony, D-Lansing, Rep. Abraham Aiyash, D-Hamtramck, and endorsed by the Black Leadership Advisory Council, align with efforts to combat discrimination and racial inequity. Gov. Gretchen Whitmer created BLAC in 2020 and charged the body with monitoring issues that threaten the well-being of Black Michiganians and offering policy strategies to address those threats. Payday loans are a threat to the financial well-being of Black Michiganians, and as a member of BLAC I applaud the Senate for passing SB 632 and strongly urge the House of Representatives to support HB 5290.

Kelli Ellsworth Etchison is the chief marketing officer and chief diversity officer for LAFCU, a Lansing-based credit union. She has been a member of the Black Leadership Advisory Council since 2020.