DURHAM, NC – Governor Tim Walz signed into law last week a measure capping annual interest rates on payday loans at 36% in Minnesota, with strict limitations on loans bearing annual rates from 37% to 50%. Payday loans above 50% will be outlawed.

The measure is expected to stop predatory payday lending as Minnesotans know it, eliminating loans that carry average annual percentage rates of interest (APRs) of 220% that can create a cycle of long-term debt. Passage of the law, which takes effect January 1, 2024, continues a growing movement among the states to protect consumers from unscrupulous lenders by passing rate caps to stop predatory payday lending with triple-digit interest rates.

To date, 20 states and the District of Columbia have passed laws to cap payday lending rates around 36% APR, including fees, or requiring other measures to ensure that payday lenders do not impose interest rates and financing terms that create a long-term debt trap for consumers.

In 2021, Illinois capped annual interest rates at 36% for payday loans that previously carried average 300% rates. New Mexico passed a law in 2022 that capped payday loans at 36% with a small fee on loans of $500 or below. The previous cap there had been 175% APR.

Payday lenders in the United States charge an average APR of nearly 400%. The typical borrower takes out ten payday loans a year, the first one often because their income does not adequately cover living expenses. The terms then make it difficult to pay the loan back without reborrowing, creating the long-term cycle of debt.

According to the Consumer Financial Protection Bureau, payday lenders collect 75% of their fees from borrowers who take out more than 10 loans per year, demonstrating that the payday lenders depend on this long-term debt trap to make their business model work. The debt trap worsens borrowers’ financial instability, resulting in unpaid household bills, increased overdraft fees, closed bank accounts and bankruptcy.

Rate cap ballot measures have strong public support across political party affiliation, and voters have passed them by large margins in several states, including Nebraska in 2020, where a 36% cap passed with 83% of the vote, and South Dakota in 2016, where 75% of voters passed a cap, bringing annual interest rates down from an astronomical 574%.

In Minnesota, a 2021 poll found 79% supported a rate cap, and that support was even higher among those who had taken out payday loans or knew someone who had: 85%.

Center for Responsible Lending (CRL) Deputy Director of State Policy Yasmin Farahi made the following statement:

We are pleased that Minnesota lawmakers recognized both the severe financial harm caused by predatory payday lending and the nearly universal support among citizens for strong reform to stop that harm.

We congratulate the former borrowers and advocates, including Minnesotans for Fair Lending, who have fought for years against well-funded industry opposition to bring a level of financial fairness to the market, so that those who have been drawn into debt traps may instead turn to safe and responsible resources to manage their needs and build their family’s financial security.

We recommend that all states end predatory payday lending by setting an interest rate cap of no more than 36%, including fees, to protect consumers and communities from the wealth-stripping tactics of unscrupulous lenders.

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Press Contact: Carol Parish carol.parish@responsiblelending.org