Demand for High-Interest Payday Loans Soars in Minnesota
Residents of Minnesota are turning to high-interest payday loans and other services outside the mainstream banking system, controversial enterprises that operate through a loophole to dodge state restrictions.
The demand for these types of loans more than doubled in recent years, from 170,000 loans in 2007 to 350,000 in 2011, the highest reported to the Minnesota Department of Commerce in state history.
While 15 other states forbid such lending practice, Minnesota lawmakers have been largely unsuccessful in several attempts to crack down on these practices. Lenders have used the loophole to charge higher rates and grant bigger loans than state lawmakers had previously allowed. And they have successfully lobbied against tighter rules.
Their Minnesota borrowers paid fees, interest and other charges that add up to the equivalent of average annual interest rates of 237 percent in 2011, compared with typical credit card rates of less than 20 percent, according to data compiled from records at the Minnesota Department of Commerce. The rates on loans ranged as high as 1,368 percent.
In all, Minnesotans paid these high rates on $130 million in such short-term loans in 2011, some of it to companies headquartered outside Minnesota. That is money the borrowers did not have available to spend at local grocery stores, gas stations and discount shops.
“This exploitation of low-income consumers not only harms the consumer, it also places a needless drag on the economy,” wrote Patrick Hayes, in an article for the William Mitchell Law Review.