Payday Loan Lenders Face Strong Alternatives in Michigan
Payday loan lenders in Michigan face strict regulations of their industry from state laws and greater competition from new pay day advance alternatives. Many people in the state of Michigan have become trapped in cycles of debt, and the state’s politicians and consumer rights advocates have turned to nonprofit organizations and employers to generate more affordable lending options. Customers with credit difficulties should seek better loan terms so that they don’t get trapped paying recurring loan fees. An article posted at crainsdetroit.com suggests that many of the state’s low-and moderate-income families have fallen victim to multiple loan fees that trap them in debt.
The program that Michigan Community activists have banded together to implement is an expansion of a successful program that provides payday alternatives in Texas. This innovative plan creates a partnership among lenders, nonprofit companies and employers to offer loans of up to $1,000 at an annual percentage rate, or APR, of 18 percent. The annualized rates of payday loans–including fees and interest rates can often be interest as high as 400 percent APR.
The Michigan Community Action Association Explores Texas Alternatives to Payday Loan Lenders
The Michigan Community Action Association has partnered with employers and community nonprofit organizations to recruit lenders to offer these low-interest, short-term loans. The payment terms don’t require a lump-sum repayment but can be financed up to one year.
The Michigan Employer Resource Network, or ERN, already administers an alternative loan program that organizes workforce assistance groups through an employer partnership. The program offers installment loans up to $1,000 at interest rates that range from 5.9 percent to 11.9 percent. The loans are available through 12 ERN agencies across Michigan, and new partnerships are being organized in Oakland and Washtenaw counties. The new initiative would make better loans at favorable terms more widely available throughout the state.
Banks and Credit Unions Face Difficulties Funding Low-Interest, Short-Term Loans
According to the crainsdetroit.com article, banks and credit unions in Michigan have the resources to offer low-interest, small-dollar installment loans to borrowers–especially since most people already have checking accounts at these financial institutions. However, without employer participation, Michigan’s financial institutions reveal that they can’t make a profit when offering high-risk, small-dollar loans. That fact tends to support the position of payday loan lenders that claim their higher interest rates are necessary to operate profitably.
Details About How to Get a Loan from Michigan Community Action’s Lending Partners
The Affordable Small Dollar Program is patterned on a program developed by the Rio Grande Valley Multibank Corporation, which is a community-development bank that’s headquartered in Brownsville, Texas. Developed in 2011, the program has already expanded its community-based lending programs to the states of Indiana and Maryland, and the program is currently expanding into Michigan and Missouri. The initiative operates as the Community Loan Center of America and is a nonprofit corporation.
The requirements for getting a loan are proof of employment and an employer that is willing to participate in the program by deducting the loan payments from an employee’s payroll and forwarding the money to the community bank. Other features of the program include:
- Potential borrowers could apply for loans up to $1,000.
- Interest rates are set at 18 percent APR.
- Nonprofit organizations can offer these loans to the communities by paying an annual $2,500 fee for the proprietary software and service assistance from the Community Loan Center.
- Lenders are strongly encouraged to report whether the loan payments are made as required to at least one credit bureau, which can improve a borrower’s credit score.
- A loan decision is usually made within 48 hours.
Reporting credit compliance to one or more agencies does increase the administrative costs of extending loans. Howard Porter, who is the managing director of the Community Loan Center, commented, “It costs the lenders a little bit to do that, which is why payday lenders aren’t doing it. We want to help our borrowers to build their credit.”
The Community Loan Center has made more that $16 million in loans since its inception and saved borrowers more than $10 million in fees and interest that most short-term lenders charge their customers who have bad or poor credit. The benefit for employers that participate in the program is that employees regard the loan program as a company benefit, and it doesn’t cost the company anything to participate. Employers of all sizes work with the program–ranging from small companies with 10 employees up to a Dallas Company that employs 13,000 people.
Pay Day Advance Alternatives Provide Lower Interest Rates and Automated Payroll Deductions from Employers
Pay day advance alternatives–such as those advanced by the Michigan ERN and Community Loan Center–provide more affordable alternatives than pay day lenders that offer pay day advance loans to consumers. One of the key advantages of the program is that borrowers can repay their loans through employee payroll deductions, which is not a benefit that payday loan lenders currently offer. This approach reduces lender risks because the loans are the least costly of any short-term loans. There is currently an average default rate of 4.5 percent–much lower than Internet payday loans–and most of these defaults result from employees leaving their jobs and migrating to employers that don’t take part in the program.
Michigan Regulations for Payday Loan Lenders
Michigan regulators limit consumer financial options by strictly controlling financial institutions that make short-term Internet payday loans. High service fees are essential to make pay day advance loans profitable according to michigan.gov. The Deferred Presentment Service Transaction Act governs the legal requirements of these types of loans. The terms that apply to short-term Internet payday loans include:
- Customers must sign a contract that spells out the fees, repayment terms and the annualized percentage rate.
- Any lender can only make one outstanding short-term loan at a time to any given borrower.
- Borrowers can obtain one additional loan from a different lender, but no there can be no more than a total of two outstanding Internet payday loans at any time.
- Each loan is limited to $600.
- Service fees are limited to 15 percent of $100, 14 percent of the second $100, 13 percent of the third, 12 percent of the fourth and 11 percent on the fifth and sixth hundred dollars.
The state of Michigan maintains a database that payday loan lenders must consult to research each loan request to be sure that the borrower hasn’t reached the limit of two outstanding short-term loans.
Internet Payday Loans Still Fulfill a Critical Need for Many Michigan Residents
Despite emerging lending alternatives, payday lenders still offer a practical resource for thousands of Michigan families–many of whom can’t pass credit checks even from community lenders or those who don’t work for participating employers. It’s important for consumers to understand all the terms of a loan option and to assess their ability to repay these loans in a lump sum or in installments.
Those consumers who have an immediate need for cash–and difficulties getting loans from traditional lenders–can save money on late fees, reconnection charges, interest charges and the other consequences of paying bills late by getting a payday loan to cover their cash shortfalls. It’s important to shop around, and emerging loan alternatives to payday loan lenders can offer better deals in many cases.
Loan alternatives, educational programs about financial management and the efforts of credit service organizations are helping Michigan borrowers to make wiser loan decisions based on getting lower interest rates and calculating their ability to repay loans without experiencing burdensome payment obligations.