Payday loans are marketed as a quick way to address an unexpected expense, but, far too often, they trap individuals who are already financially vulnerable in a vicious cycle of perpetual debt because of their short repayment periods and the high fees that come with them.

In fact, here in Michigan and in several other states, payday loan fees often exceed an annual percentage rate (APR) of 340%, making it extremely difficult — if not impossible — for the people who need them to pay them off in time. To put that into perspective, according to U.S. News and World Report, the average APR for credit cards in the U.S. was 20.09% as of February 2023 and the average APR for a new car loan for buyers with an average credit score was 14.9% in August 2023.

Thankfully, legislation was reintroduced last week by state Sen. Sarah Anthony and state Rep. Abraham Aiyash (Senate Bill 632 and House Bill 5290) that would place a 36% cap on payday lending rates in Michigan, inclusive of all fees.

As a longtime supporter of payday lending reform in Michigan, the Michigan League for Public Policy has stepped up to support that legislation, as it would go a long way in protecting Michigan workers and families from predatory lending practices.

As it stands today, Michigan’s triple-digit payday loan rates often result in missed payments, which can then lead to an insufficient funds fee from a customer’s financial institution and potentially a returned check fee from their lender on top of what is already owed. It can also result in damage to an individual’s credit score if the loan is ultimately sent to a collection agency, limiting their access to loans with lower interest rates in the future.

What’s even more problematic is that individuals will often resort to taking out a second payday loan to pay off their first loan or immediately after paying off their first loan to get by and keep collections at bay. In fact, according to the Community Economic Development Association of Michigan, payday borrowers in Michigan take out an average of 10 loans per year and 70% reborrow the same day they pay off their previous loan. That kind of back-to-back borrowing only kicks the can further down the road and is how individuals can end up in a cycle of debt that spans several years.

Those kinds of cash traps are also predatory in nature, as 77% of payday lending advertisements target communities of color and lenders disproportionately locate stores in rural and low-income areas, as well as Black and Latinx communities, where individuals have already faced extraordinary barriers to prosperity because of our country’s long history of systemic racism and discriminatory housing practices.

The bills recently reintroduced by Sen. Anthony and Rep. Aiyash are in line with what almost half of the states in our country have already done to protect their constituencies. In fact, the Center for Responsible Lending recently reported that, as of June 2023, 20 states and the District of Columbia had either already passed laws to cap payday lending rates around 36%, inclusive of all fees, or had put measures in place that ensure lenders can’t saddle consumers with interest rates and financing terms that lead to long-term debt traps.

The recently reintroduced bills are also in line with protections that have already been put into place by the U.S. Department of Defense, which placed a 36% cap on payday loan rates for all active duty military families back in 2006 with the enactment of the Military Lending Act.

It’s time for those kinds of commonsense protections to be extended to all people who call Michigan home, as high-cost, short-term payday loans have caused incredible harm to struggling Michigan workers and families, including community members in Alpena, Alcona, Montmorency, and Presque Isle counties, where poverty rates are 15%, 16%, 16% and 13%, respectively.

By taking millions of dollars out of the pockets of Michiganders, payday lenders have significantly hindered their economic self-sufficiency and ability to build assets, resulting in more dependency on food assistance, delayed payments for medical care and rent, missed child support payments, and an increased likelihood of bankruptcy.

That, in turn, has weakened our state economy and local communities while placing more strain on existing governmental services.

We applaud Sen. Anthony and Rep. Aiyash for recognizing how unsafe payday loans are in our state and for continuing to fight for the people of Michigan with those bills.

We look forward to working with our partners to ensure that legislation reaches the governor’s desk and becomes a law here in our Mitten State.

Patrick Schaefer is economic security policy analyst at the Michigan League for Public Policy.