Payday loans from storefronts and online lenders are marketed as short-term solutions for emergency use, but the reality is quite different. Credit: (c) Tony Webster | CC BY 2.0

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Melissa left a difficult relationship and became a single mother. Things looked bright as she started on her own again–until financial surprises came her way.

Her son’s Social Security survivor’s benefits were cut by more than $200 a month, and much-needed therapy visits for her children added another $200 in monthly expenses. She fell behind on all her bills, including rent, and late fees started to mount.

So Melissa did something she hoped she’d never need to do. She took out a payday loan.

Payday loans from storefronts and online lenders are marketed as short-term solutions for emergency use, but the reality is quite different. Lenders typically do not do a credit check or verify a borrower’s repayment ability, so the approval odds are very high.

This process is appealing for individuals with low or no credit. Plus, the money is relatively quickly available in one’s bank account within days of approval.

Unfortunately, the interest rates on these loans are absurdly high. 

Additionally, unlike other loans (student loans, for example), you don’t pay them back over time. You must pay them back all at once. To qualify, all you need is proof of income and a checking account. Then you can get a loan (typically for $500 or less).

So, for example, let’s say you borrow $375. You agree to pay a one-time fee of $55, and then you must repay the full $375 in two weeks. However, if you are like most borrowers, you cannot afford the $375 payoff, so instead, you pay the “one-time” $55 fee again to renew the loan for another two weeks. Typical payday loan borrowers fall into the renewal cycle (aka the payday loan debt trap) for about five months of the year–meaning they’d pay $550 in fees on a $375 loan.

Melissa initially borrowed $480 from Payday America and was expected to pay back $516.15 two weeks later–the total $480 she borrowed plus $36.15 in interest and fees, an effective interest rate of 196.35 percent.

At first, she was hopeful that she could pay it off in full on her next payday, but the hefty fee and her other monthly expenses and mounting bills soon showed her she couldn’t stay ahead. She knew that she couldn’t get out of it alone, so she turned to Exodus Lending, the only Minnesota nonprofit that works with those stuck in a predatory loan debt cycle, for help.   



Minnesotans took out 177,000 payday loans in 2020—with an average interest rate of 273 percent.

Data from the Minnesota Department of Commerce on payday lenders reveal that nearly 27,000 Minnesotans took out more than 177,000 payday loans from licensed lenders in 2020. Although thousands of Minnesotans feel that they are drowning from the effects of predatory loans with interest rates averaging 273 percent, this is entirely legal. No one would be struggling with high-interest loans if we had better lending laws with more affordable interest rate caps.

No one would be struggling with high-interest loans if we had better lending laws with more affordable interest rate caps.

Minnesotans of color are more at risk for falling into payday loan debt, according to a 2021 Financial Health Report study, “What Financially Coping and Vulnerable Americans Pay for Everyday Financial Services.” FinHealth Network finds that Latino households are 3.1 times more likely to turn to payday loans than white households, and Black households are 3.8 times more likely.

The billion-dollar payday lending industry is a clear byproduct of the United States’ history of discriminatory residential and economic policies that created and worsened racial disparities. Policies and practices like redlining and banking deregulation set the boundaries of (and restricted the availability of resources within) neighborhoods of color. 

The billion-dollar payday lending industry is a clear byproduct of the United States’ history of discriminatory residential and economic policies that created and worsened racial disparities.

As regulated mainstream institutions fled low-income communities, insufficiently regulated payday lenders flooded them. Research from the North Carolina-based nonprofit the Center for Responsible Lending shows that lenders disproportionately choose to place their high-cost lending storefronts in Black and Latino communities, even when those communities have the same or higher incomes than white communities.

Instead of taking out a predatory payday loan,  borrowers can turn to organizations that encourage them to seek alternatives such as turning to family or friends, using a low-interest credit card, getting either a personal or payday alternative loan from a bank or credit union, or borrowing from a peer-to-peer network. 

Instead of taking out a predatory payday loan, borrowers can turn to organizations that encourage them to seek alternatives such as turning to family and friends, using a low-interest credit card, getting either a personal or payday alternative loan from a bank or credit union, or borrowing from a peer-to-peer network.

It’s also important to advocate for fair and just lending laws. A change in the system is the only way to free all individuals from the payday loan debt cycle. Eighteen states and the District of Columbia have enacted rate cap legislation to protect consumers from these products, but similar efforts in St. Paul have fallen short as the deep pockets of the payday loan industry make for a powerful opponent, despite statewide polling showing overwhelming bipartisan support for interest rate caps.

In frustration, several Minnesota cities have begun seeking solutions at the local level. In 2021, after discovering that Clay County had the highest rate of payday loan borrowing per capita in Minnesota, the Moorhead City Council enacted a rate cap of its own.

The U.S. Congress also has an opportunity to act on rate cap legislation with the Veterans and Consumers Fair Credit Act, currently before it. Minnesota Senator Tina Smith and Representative Ilhan Omar are co-sponsors of this bipartisan legislation. 

We need to end these predatory practices so Minnesota families can stop paying interest rates averaging 273 percent and put that money toward groceries, housing, and taking care of our families.

Anne Leland Clark

Anne Leland Clark recently became executive director of Exodus Lending, a St. Paul-based nonprofit devoted to helping people deal with payday loan debt. She is a longtime advocate for financial inclusion...