Recently, an initiative by an activist group to cap annual interest rates on consumer loans at 36% failed to gain traction in Michigan. Although it claims to have collected more than 575,000 signatures and submitted nearly 400,000 to the Secretary of State’s office, the Office of Elections has concluded that less than 275,000 were valid – well below the threshold of 340,047 signatures needed to put the question on the ballot.
This is good news for Michigan consumers, especially those who have difficulty accessing credit and therefore rely on alternative financial services to make ends meet when an emergency expense arises. It is also good news for the many consumers who can access credit and use alternative financial services because they are faster, easier and more efficient than loans considered “traditional”.
What these activist groups don’t want consumers to know – and what they depend on consumers not understanding – is that the core of their persuasive message simply doesn’t work when you apply basic math.
Insisting on using an annual percentage rate (APR) as the sole means of evaluating financial products is a convenient and dishonest way to generate support for their position.
But annualizing the interest rate on a loan repaid in less than a year artificially inflates the interest rate to eye-popping numbers, so judging the equity of these loans in actual dollars and cents is a much more useful.
For example, on the basis of cost alone, few would insist that a $100 loan with $10 interest paid off in 30 days is usurious or immoral. Many would probably agree to this deal.
However, when the interest rate on that same loan is annualized, it rises to more than 121% – well above the threshold that consumer advocacy groups denounce as usury. Conceptually, this is the same reason a hotel room is listed at $200 per night instead of what would equate to an annual rate of $73,000.
In other words, an arbitrary rate cap that makes no mathematical or practical sense – such as the one this activist group wants to see enacted – would simply eliminate many of the credit products on which a Michigan’s large consumer population.
To compound the problem, failure of the rate cap initiative would also be highly discriminatory, targeting only a select set of lenders while leaving others, including those owned by governments, free to lend at the rates that they wish, because government-owned lenders are not subject to the state. laws.
As with any sector that gives state-owned companies an advantage and near-monopoly, this would stifle innovation and market competition, which also benefits consumers.
Finally, implementing a statewide price cap via state law exports regulatory authority from state regulators who presumably know Michigan consumers best and their needs to out-of-state regulators who are not accountable to Michigan voters. This applies whether the law was passed by the Legislative Assembly or enacted by ballot.
Like government-owned lenders, federally chartered financial institutions are not subject to state laws. They are not supervised by state regulatory agencies. In most cases, their regulators are unelected bureaucrats operating out of Washington, DC.
In Illinois, the legislature has passed and the governor has signed into law a rate cap bill similar to what activists are pushing in Wolverine State. It was a dismal failure and illustrates what would happen if Michigan repeated the mistake.
Many of the licenses held by Illinois installment lenders are no longer active in the state since the rate cap came into effect. The number of loans to subprime and deep subprime borrowers has fallen sharply. In short, borrowers have suffered.
Interest rate caps only reduce the availability of credit. Michigan consumers were lucky this year because the militant campaign failed. These same activists will almost certainly try again. And when they do, Michigan voters would be wise to reject them.
Kent Kaiser is Secretary/Treasurer of the Domestic Policy Caucus, whose mission is to support transparent public conversations on critical policy issues at the local, state and federal levels, to educate voters on the issues that will have the greatest impact on their community and to support community members as they engage with elected officials on these critical policy issues. More information is available at www.domesticpolicycaucus.com.