The history of Michigan shows the limit of payday lending service. The law tried to limit the interest rate cap to 25%. In 2005, Michigan was the last state to allow payday lending at rates of 340% APR or higher. But nowadays, this state is in the list of states colored in red on lending map. If a client applies for online payday loans, the APR will be equal to 370%.
As a result, the Michiganders face payday loan debt trap if they issue $300 loan for a short term (on average this is a 14-days term). Nowadays, the citizens of this state believe only a new accepted interest rate cap of 36% will help climb out of the lending trap.
The opinion relating to interest caps was not unanimous. Some of them believe that these restrictions protect consumers from the access to fast credits. Others claim this will prevent people from issuing fast lending options especially in difficult financial situations.
So that Michigan citizens occasionally find themselves in an ambiguous situation: if you lack funds up to the end of the month, have no relatives and friends to borrow some cash, but have no opportunity to issue a payday loan for a short term because of high rates.
But it won’t be conducted among citizens to see the real picture. As it was specified, many people use payday lending as the main way out from a difficult living situation. They adjust to terms and rates offered by many US lenders.
What to choose: an interest cap or a possibility to issue fast cash advances?
Each state, including Michigan, should weigh pros and cons of the future law and how it will impact on Americans. There are cases when people cannot find another way out but online credits. Besides, not all clients are eligible to take out a bank product as it sets strict requirements to qualify for it.
If you visit a bank, you have to provide many certificates, papers. Moreover, the applications are reviewed for up to 14 business days. Such credits are only justified in the case you are going to issue a mortgage or an auto loan. One more reason is to borrow large amounts for a long term.
Payday loans, according to the definition and practice, are short term financial products, they are not applicable for periods over 30 calendar days. Long term APR offered by banks seem to be much more favorable.
Each borrower may find another way to issue financial products. This is a credit union. It struggles for lower rates and reaches some success.
One more option to reduce the debt trap is to apply a 30-day “cooling off period”. You cannot submit an application for 30 days from the moment the first credit has been successfully paid.
There are many options to limit the rates, debt trap and we cannot claim interest rate caps are the only possible initiative.