Ron Leeball said he learned an expensive lesson when he took out a $2,400 payday loan in 2010 that went toward traveling and legal expenses to get his 17-year-old son extricated from a mental institution in Alabama.
Thirteen months later, the Grand Rapids resident paid off the loan — but at 375 percent APR interest. The final cost of the loan was $10,000.
“Payday loans” may be marketed as quick, short-term loans, but Leeball said he saw another side to the multi-billion dollar industry.
“We live in a shameless world where people will take advantage of you over a dollar,” said Leeball. “They don’t call it an interest rate; they call it a fee. How they get away with charging an enormous amount of interest is beyond me.”
The Micah Center has some answers for people like Leeball, including one day launching an alternative to short-term payday loan outlets by linking with the Inner City Christian Federation.
The Micah Center is a consortium of about 40 churches in Grand Rapids, Wyoming and Kentwood that has mobilized to thwart excessive interest rates on the multi-billion dollar payday loan industry that often charges more than 300 percent interest.
The Micah Center has organized protests in front of payday loan outlets and sponsors social justice lectures the first and third Tuesdays of each month at Hope Reformed Church, 2010 Kalamazoo Ave. SE. It recently produced a 30-minute documentary, “The Case Against Payday Lending,” that focuses on the Grand Rapids area, where there are significantly more payday loan operations than McDonald’s restaurants. It features two people who received payday loans, including Leeball, an ex-employee of a payday loan operation and Rev. Dallas Lenear, chairperson of the Micah Center’s task force on payday loans.
The Micah Center also plans to ask the state for legislation that caps the interest rate payday loan operations can charge, said Jordan Bruxvoort, director of the nonprofit. That will be difficult, he predicted. “The payday loan industry is powerful,” he said. “They have lobbyists who have experience in what they do. They’ve been very influential in a lot of states, and not only with politicians but with community leaders, including some pastors.
“We think poor people should have other options for getting small loans at non-exploitive rates. Most banks don’t want to deal with $500 to $600 loans, and payday loans fill a market niche.”
Payday loans, also known as payday advances, are small, short-term loans not necessarily linked to a user’s payday. They are sometimes referred to as “cash advances,” though that phrase also can refer to cash provided against a prearranged line of credit.
Legislation regarding payday loans varies widely between states. Some keep a tighter leash on what payday loan outlets can charge, often at a 36 percent cap. Michigan, however, permits payday lenders to charge up to 390 percent interest, according to the Center For Responsible Lending. Moreover, 76 percent of Michigan’s payday loans result in “churning,” the practice of quickly taking out a new loan once an older one is paid off.
Clients resort to payday loan outlets to keep the lights on, put food on the table or finance a car repair, often without considering the long-term consequences, said Bruxvoort.
“They’re desperate enough that they’ll try anything,” he said. “There’s an intense psychological effect when you’re broke and there’s a place that will put six $100 bills in your pocket. That’s a very powerful draw. But it doesn’t feel that different from bondage.”
In other words, it’s a debt trap. The typical payday loan borrower is indebted for 212 days with an average of nine payday loan transactions at annual interest rates of more than 400 percent, according to the Center for Responsible Lending. In Michigan, the average payday loan is $402.
The Center for Responsible Lending adds that those who use payday loans typically have less income, lower wealth and fewer assets than families who do not use such loans. In 2007, the median income for payday borrowers was $30,892. And payday lenders are increasingly offering loans on the basis of unemployment checks at rates of 300 and 400 percent APR.
Achieving financial freedom and sustainability is where the ICCF comes in, said Bruxvoort.
“We’re working to create an alliance of financial institutions that will offer lower interest rates so people have a choice,” he said. “We’re in the process of trying to develop what a loan provider would look like and then raising a substantial amount of money to lend money out. Ideally, we’d like to be able to expand beyond one location.”
The details need to be worked out, but the plan is to establish a lending institution that would offer short-term loans with a small interest rate. The money raised from the interest rate would then go into a client’s savings account, which they could build while paying off the loan, said Jenny Siegel, ICCF education manager.
“The hope is that somebody will be given a fair short-term loan product at a fair interest rate and have savings at the end of the loan,” said Siegel.
Siegel said the high-interest rate is not the only issue.
“A person generally who is obtaining a payday loan is not necessarily told everything up front,” said Siegel. “They’re not told they’ll need to pay it back at 400 percent, or the APR (annual percentage rate), so there’s a lack of truth in lending disclosure, or if they elect to extend the loans, they’re not always going to pay on the principal.
“For some, that is what seems to be the only option. Maybe they don't have the best credit score in the world, or maybe they’re under-banked and don’t have a bank to go get a short-term loan (from). Maybe they don’t have a family member to rely on, so payday lending institutions become the options, which is why becoming an alternative source is a fair way.”
Another problem is a loophole in Michigan, said Siegel. State law allows people to secure only two cash advance loans from a bricks-and-mortar office, but there is no such limit if loans are made online.
Bruxvoort said the Micah Center is working with the Center For Responsible Lending to organize a protest in front of payday lending centers on Martin Luther King Jr.’s birthday, Jan. 15.
“We are involved in this because we want to help protect the rights of the poor by finding alternatives so they can receive a loan at a lower interest rate.”