If Michigan SB 632 (2024), which caps payday loan interest rates at 36%, is passed, it could have negative effects. While it aims to protect consumers from predatory lending practices, here are some potential negative effects:

1. Reduced Access to Credit for Vulnerable Borrowers

 • High-Risk Borrowers Excluded: Lenders might stop offering loans to borrowers with poor credit or high default risks, as the 36% cap may not cover the risks and operational costs associated with these loans.

 • Closure of Payday Loan Businesses: Many payday lenders operate on higher interest rates to stay profitable. A cap might force them to close, reducing credit options for those with few alternatives.

2. Rise of Unregulated Lending

 • Increase in Illegal Loan Sharks: Borrowers who can no longer access regulated payday loans may turn to unregulated or illegal lenders, potentially exposing them to predatory practices and unsafe debt collection methods.

 • Online Lenders: Some consumers may turn to out-of-state or online lenders who may not comply with Michigan’s laws, leading to higher costs and less legal protection.

3. Potential Job Loss in the Payday Lending Industry

 • Economic Impact on Payday Lenders: The payday loan industry employs workers in Michigan, and a 36% cap could lead to significant layoffs or business closures.

 • Impact on Local Economies: Communities that rely on payday lenders as part of their economic ecosystem may see a decrease in business activity.

4. Limited Short-Term Lending Options

 • Increased Difficulty Meeting Emergency Needs: Payday loans are often used for urgent financial needs. Without them, consumers may struggle to find fast, small-dollar credit, leading to potential late fees, utility shutoffs, or eviction.

 • Reduced Options for Those Without Bank Accounts: Many payday loan users are unbanked or underbanked and may not qualify for traditional lending products like personal loans or credit cards.

5. Shift to Alternative High-Cost Products

 • Other High-Interest Credit Products: Consumers might turn to overdraft protections, credit card cash advances, or installment loans, which could have fees or terms more unfavorable than payday loans. Many times with them accruing further interest if unpaid, whereas payday loans do not accrue interest in Michigan.

6. Administrative Costs and Enforcement

 • Increased Regulatory Burden: The state would need to enforce the 36% cap and monitor compliance, potentially increasing administrative costs. This could divert resources from other regulatory priorities.

7. Potential Economic Disruption

 • Unintended Consequences for Low-Income Communities: While the bill aims to protect these communities, reduced access to credit might exacerbate financial struggles, especially for those living paycheck to paycheck.