Banking & Finance, Government, and Law

‘Payday’ loans aren’t loans under Michigan law

They are not subject to the legal limits on loan interest rates in Michigan.

June 26, 2015
| By Pete Daly |
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The so-called payday lenders in Michigan are subject to state law and regulated by the Michigan Department of Insurance and Financial Services, but they are not subject to the legal maximum interest rates established by state law.

Barbara Strefling, director of the DIFS Office of Consumer Finance, said the “deferred presentment service” providers commonly known as payday lenders “are not lenders.”

“The law calls it a transaction, but it’s not a loan — it’s not the lending of money. That’s how the statute describes it,” said Strefling.

The Michigan Attorney General has a consumer alert on its website with basic information about payday loans: “Payday loan, cash advance, or check advance loan are commonly used phrases to describe what Michigan law refers to as a ‘deferred presentment service transaction.’ For the purposes of this Consumer Alert, we will refer to deferred presentment service transactions as “payday loans.”

A license is required to be a payday lender. The attorney general’s website states that “for the purposes of this Consumer Alert, we will call the licensee a ‘payday lender.’”

It describes a payday loan transaction as a “small, short-term, high-cost arrangement where the customer gives the payday lender a check to cover the payday loan amount and service fees. In return, the payday lender provides the customer with immediate cash, check, or money order, depending on the needs of the customer. Typically, payment is made from the customer’s next paycheck.

To qualify, the customer usually only needs personal identification, a checking account and proof of anticipated income from a job or governmental benefits.”

“Very high service fees, combined with a short repayment period, may cause customers to fall into a payday loan debt trap. Instead of short-term financial relief, the customer experiences perpetual indebtedness,” states the attorney general’s website.

“Payday loans can be very expensive,” states the Consumer Alert. “For example, a customer who borrows $100 will be charged up to $15 for a two-week loan (the payday lender may provide for a shorter or longer period — up to 31 days). The customer writes a check for $115 and receives an immediate $100 in cash.

“Because the payday loan is short term, the service fee translates into a triple-digit annual percentage rate (APR). The following illustrates the calculation of the APR on this payday loan.

1. The daily interest charged ($15/14 days) is $1.071429.

2. Convert the daily interest charged into an APR: $1.071429 x 365 days in a year = 391 percent.

While the actual cost of this two-week loan is $15, the annual percentage rate of that $15 is 391 percent!” the website states.

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