It started with a $300 loan.
Desiree Smith was already surviving paycheck to paycheck when she suffered a severe concussion. After spending all of her paid time off on medical appointments and physical therapy, she was forced to take unpaid time off of work. She had to pay her bills somehow. For Smith, a payday loan — short-term loans, often for $500 or less — seemed like the only option.
“It was a god-awful mess,” Smith said.
Smith’s finances spiraled.
The first loan came with a 147% interest rate and fees. After about two or three more loans, her payday lender, Payday America, told her she was eligible for a $600 loan. Every time Smith went back, she kept qualifying for more money — and larger loans meant more money spent on interest rates and fees.
“I never had enough money for anything,” Smith said. “My niece graduated — (I was) too ashamed to go because I didn’t have a gift. Just never enough.”
Smith told her story to state lawmakers in February during a committee hearing on a bill (HF290) to cap interest rates for payday lenders at 36%, which would put Minnesota in line with 18 other states. (Twelve states have outright bans on payday lenders.)
The bill has passed through all committees in both chambers, but it hasn’t been scheduled for a House or Senate floor vote yet.
The average interest rate for a Minnesota payday loan is around 200%, CNBC reports. To put that in context: The average credit card interest rate has hovered around 20% to 25% in the past few years. Bank loan interest rates can be anywhere from 4% to 36%.
There were about 20,000 people who used payday loans in Minnesota in 2021 — and a total of 176,241 loans, according to Minnesota Department of Commerce data obtained and analyzed by Exodus Lending, which is the only Minnesota organization of its kind that helps people stuck on the payday treadmill by refinancing their loans.
While payday loans are supposed to help people get by between paychecks, industry opponents say Smith’s story isn’t uncommon: Many people who take out payday loans find themselves trapped in a cycle of debt.
Payday lenders are more likely to set up shop around low-income neighborhoods and communities of color. In Minnesota, Black people are twice as likely to live near a payday lending store. Nationwide, Black households are almost four times as likely and Latino households are more than three times as likely to take out payday loans than white households, according to a 2021 report by Financial Health Network.
“I saw persons with disabilities waiting in line [at Payday America],” Smith said. “I saw seniors; a lady with a walker. It was just sad, you know, the type of people — I mean, I saw people with work uniforms on, a lady from Burger King. You don’t make that much to be paying that much in interest. I was like, what have I gotten myself into?”
Even finance professionals can get stuck in the debt cycle: While working as an accountant at the University of Minnesota in 2016, Melissa Juliette took out a payday loan to make ends meet amid a divorce that left her supporting two kids by herself.
“When I took the first one out, of course I thought ‘Oh, I’ll be able to pay it back right away, I make decent money,’” Juliette said.
A year after Juliette took out her first loan, she had four separate loans with payday lenders. Her credit cards were in collections and she had fallen behind on her electric bill, her car payment and her medical bills.
“In order to stop the cycle, I had to close a checking account and just let the loan default. That felt terrible, but if I didn’t do that, they would have just taken the money out of my account, and I wouldn’t have been able to eat. My kids wouldn’t have been able to eat,” Juliette said.
Juliette has a degree in accounting and finance from the University of Minnesota. She studied predatory behavior by financial institutions in college, and said she never would have recommended payday loans to anyone — but at the time, she felt she had no other choice.
“It was because I was desperate,” Juliette said. “Not because I was like, ‘Oh, I’m going to take out a payday loan to go on vacation!’ I literally had to keep the lights on.”
Juliette said the people who take out payday loans are often in similar situations. Juliette is now a board member with Exodus Lending, which refinanced her loan at a 0% interest rate. She often hears people say they took out their first loan due to “small emergencies,” like a broken-down car or an unexpected medical expense.
More than half of all Americans don’t have enough in savings to afford a $1,000 emergency expense, according to a Bankrate annual survey.
Payday America, the largest high-interest lender in Minnesota, said customers rate their services highly, pointing to favorable Google reviews. The CEO of Payday America, Brad Rixmann, said in a statement sent to the Reformer that only a “small percentage” of payday customers take out more than one loan in a year.
Data collected by the Minnesota Department of Commerce in 2021, however, found the average Payday America borrower took out 10-15 loans in 2021. More than 60% of borrowers in the same year had five or more loans — and 12% of borrowers had 20 or more loans.
“We haven’t found the person who has taken one and been done when it comes to payday loans,” said Meghan Olsen Biebighauser, an organizing director at Exodus Lending.
Rixmann said that if someone were to take out 10 loans for $500 each, they’d only pay $313 to borrow $5,000.
Biebighauser said that’s not how the payday loan structure actually works: In every case at Exodus Lending, a borrower is just re-borrowing the same $500, because they can’t afford to pay the entire principal with the high interest rates and fees. That borrower would never have access to $5,000 at once, or even more than just the $500. From that perspective, a borrower would be paying $313 to borrow $500 for a few months.
Many borrowers pay $31 in interest every two weeks to borrow the same $500 for months — and sometimes years, Biebighauser said.
Late fines can sometimes add on another $25-$30 to a borrower’s fees. Most lenders, however, draw payments automatically from borrower accounts, which forces many to go back and re-borrow the principal amount because their budgets can’t handle paying the whole amount, according to Biebighauser.
Biebighauser said that in an Exodus Lending focus group, borrowers described an “express lane” at some payday lenders for repeat borrowers.
Smith said the speed at which payday lenders churn through repeat borrowers is astonishing: She was usually in and out in three to five minutes. According to Smith, the cashiers would race each other to see who could move through their lines the fastest.
“You see [the] same faces before closing,” Smith said.
Payday lenders say they won’t be able to do business in Minnesota with the 36% interest rate cap, and that would ultimately hurt people who need the loans by pushing them to unregulated online marketplaces.
A Pew Charitable Trust study, however, found regulated states saw a large decrease in payday loans, and that borrowers do not seek online loans. More than 80% of borrowers said they would cut back on expenses if payday loans were unavailable. A majority of borrowers also said they would delay paying bills, borrow from friends and family and sell or pawn possessions.
The “sky hasn’t fallen” in states that have enacted the 36% interest rate cap, Biebighauser said.
Under the Military Lending Act, for instance, members of the military and their families are already protected under a 36% interest rate cap.
“If they can’t come up with a business model with a 36% interest rate — which is higher than what most people would choose to take — then that’s on them,” Biebighauser said.
Juliette said she was too ashamed to ask for help when her financial situation led her to take out payday loans, but she would recommend that people ask for support from community organizations or friends and family before taking out a payday loan.
When Smith got into financial trouble with payday loans, she started using the neighborhood food shelf to help feed her son. She felt ashamed — but at least he had food to eat, she said.
After a year of increasing debt, Smith’s credit had plummeted, her credit cards were in collections and she was late on her rent at least eight or nine times.
“That level of debt and money, it just does something to the psyche…everything was in fight or flight,” said Smith, whose advice for payday lenders is blunt: leave Minnesota.
Smith needed a year or two to get her finances back on track after discovering Exodus Lending. Now, she teaches financial literacy as an employment specialist for Build Wealth MN. She has an emergency savings fund, her credit score is in the mid 700s and she bought a house in Ramsey last year. She’s teaching her son financial literacy, too: He’s an authorized user on her credit card, which will help him build his credit score.
None of it, Smith said, would have been possible without help refinancing her loan — and she knows she will never take out that kind of loan again.
“Go DoorDash or something, deliver some groceries and you can get paid the next day. Go donate your plasma,” Smith said. “I would never recommend that type of loan to anyone.”