Minnesota

DFL legislators introduce bill to limit interest rates on payday loans

House lawmakers advanced on Wednesday an invoice to cap the sky-high interest rates on payday loans, which proponents say often lure borrowers into a debt cycle.

“These lenders are dedicated to reaching out to people who don’t have access to a bank account — or who can’t access a traditional loan — and they’re taking their hard-earned money. It’s theft and imprisonment,” said Vienna Wilson, CEO of Exodus Lending, which helps Minnesotans refinance payday loans.

Payday loans are short-term loans, often for $500 or less. If the law passes, Minnesota would join 18 states and the District of Columbia to limit interest rates to 36% or less. In 2021 the The average interest rate on a payday loan in Minnesota was 200%. The practice was illegal in Minnesota until 1995. Proponents believe the loans are predatory: Wilson said payday lenders are “legal loan sharks.”

“If you can’t run your business at 36% profit, you might not have a business at all. We shouldn’t legalize robbery,” said MP Ginny Klevorn, DFL-Plymouth.

Payday loans are often marketed as “one time” loans for borrowers who want to survive until their next paycheck. However, data from the Minnesota Department of Commerce shows that lenders reported an average of nine loans per borrower in 2021.

That’s what consumer advocates say Payday lenders often set up businesses in low-income neighborhoods and communities of color. Black households are nearly four times as likely to take out payday loans and Latino households are more than three times as likely as white households. according to a 2021 Financial Health Network report.

Payday America, a Minnesota lender, said capping interest rates would cut off access to payday loans in the state and force Minnesotans into the unregulated online marketplace.

“Below that salary cap, lenders just won’t do business in Minnesota,” said Paul Cassidy, a Payday America lobbyist. He showed a video of customers saying they couldn’t survive without the loans.

Republicans supported lenders’ view that the bill would deprive people of access to the credit they need and push people toward online lending.

“You will be exposing Minnesotans to greater risk, higher fees and greater uproar if you take this tool away from them,” said Rep. Kurt Daudt, R-Crown.

A study by the Pew Charitable Trusthowever, found that regulated states have seen a sharp drop in payday loans and that borrowers are not seeking online loans — they are more likely to cut spending and try alternative ways to borrow money.

DFL-Eden Prairie MP Carlie Kotzya-Witthuhn said that if the law passes, she plans to introduce legislation that will “fill the void” left by payday lenders by giving people access to cheaper credit .

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