Jonah took out a loan for $365 and ended up repaying $1,082, over 11 months, an annual percentage rate of 197%.
Lila took out a loan for $525, was caught in a cycle of reborrowing and ended up paying an APR of 700%.
These are entirely typical scenarios for the thousands of Minnesotans who use payday loans to make ends meet.
Although thousands of Minnesotans feel that they are drowning from the effects of predatory loans — with interest rates averaging 200%, and sometimes even reaching into the thousands — this is entirely legal.
Payday loans from storefronts and online lenders are marketed as short-term solutions for emergency use, but the reality is quite different. In 2021, licensed lenders in Minnesota reported an average loan amount of $365, carrying an average annual interest rate of 197%.
Because lenders often do not do any due diligence upfront in checking a borrower’s ability to repay, borrowers often find themselves unable to repay the full loan in such a short time frame — usually two weeks. They become stuck in a cycle of reborrowing.
In 2021, licensed payday lenders in Minnesota reported an average of nine loans per borrower.
These financial products were illegal in Minnesota until 1995. But once authorized by the Legislature, storefronts spread like wildfire, targeting low-income communities and communities of color. They are just as much of a problem in greater Minnesota and the suburbs as they are in the cities, however.
According to data reported to the Minnesota Department of Commerce for 2021, lenders in Hubbard, Anoka and Blue Earth counties issue the highest number of loans per capita.
Minnesota lags behind 18 states and the District of Columbia, which have passed interest rate caps or 36% or lower, protecting consumers from these predatory loan products.
This common-sense reform has been enacted in states as reliably blue as Massachusetts and as reliably red as Nebraska. Thirty-six percent, while still notably high, is a popular benchmark for regulating these loans. It would bring state regulations into alignment with the Military Lending Act of 2006, which protects active duty service members and their families with a 36% interest rate.
This reform is exceedingly popular. A poll conducted by Emerson College showed that 79% of Minnesotans support an interest rate cap of 36% or lower — lawmakers rarely get to make such a safe vote.
For over a decade, community organizations, former borrowers, faith communities and long-time supporters in the Legislature have sought to limit the amount of damage these lenders could inflict on working Minnesotans. But the combination of gridlock at the Legislature and a powerful payday industry — which exerts power at the Capitol through financial donations and extensive lobbying — has failed to protect Minnesotans from these debt traps.
Next year offers Minnesota a new opportunity to enact an interest rate cap that reflects our values. Payday lenders are stripping wealth from communities that can least afford it.
We need to end these predatory practices so that Minnesota families can stop paying interest rates of 200% to payday lenders, and put that money towards groceries, housing and taking care of our families.
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