Dianna Johnson's mother was 76 years old when she took out her first payday loan. She couldn't pay off the roughly $200 debt, so she borrowed another. And another.
"It's a vicious cycle," said Johnson, who helped her mom repay the loan after watching her spend a year returning to the Payday America in Coon Rapids.
Around 25,000 Minnesotans leaned on payday lenders in 2022, on average racking up six loans with annual percentage rates of around 210%, according to Minnesota Department of Commerce data. That practice is ending, and with it a "debt trap" opponents said has sucked low-income borrowers into a cycle that's difficult to escape.
Minnesota has joined 19 other states that have restricted payday loans, which are generally small amounts of cash — often a few hundred dollars — meant for borrowers to pay off in a couple weeks. The state capped annual percentage rates in most cases at 36% starting Jan. 1, 2024, though lenders could go up to 50% if they follow strict rules to ensure the borrower can repay the sum.
Minnesota's biggest lender, Payday America, stopped offering the loans shortly after the law was passed this spring.
Payday lenders have largely disappeared in other states that added such interest rate restrictions, said Yasmin Farahi, deputy director of state policy and senior policy counsel at the Center for Responsible Lending.
"How payday lenders succeed is making sure their customers fail," Farahi said.
She said a recent study by the center found payday loans sapped roughly $4.5 million in fees from Minnesotans in a year.
The businesses typically operate in communities of color and low-income neighborhoods, Farahi said. She said states will "no longer have that huge fee drain that is being stripped from these communities that are already really hard-hit and struggling."
But who steps in to fill the need remains unclear.
"The legislation did nothing to help those we served. In fact, all it will do is force them to unregulated, unlicensed, online lenders with little or no recourse," Payday America CEO Brad Rixmann said in a statement.
He said online lenders will charge more than his company did for a two-week loan.
Proponents of the new law disagreed. They pointed to research from the Pew Charitable Trusts that did not find a major difference in the use of online payday lenders between states with and without in-person payday lending businesses.
Payday lending took off across the country in the 1990s after states eased regulations on lenders. Before that, many people turned to family or friends when they were in a financial bind, said Rep. Erin Koegel, DFL-Spring Lake Park. That option is sometimes best, said Koegel, a chief sponsor of the measure at the Capitol.
"A lot of times it's just pride. They don't want to turn to family members or friends to ask for some support," Koegel said.
She said more banks, credit unions and micro-lending organizations have been stepping in to fill the need for small, short-term loans "without being predatory." In the past five years, six of the eight largest U.S. banks have rolled out small loans, providing a more affordable alternative to payday loans, according to Pew researchers.
Koegel said she also hopes to see more organizations, such as Minnesota's Exodus Lending, which helps people refinance high-interest loans at 0% interest. The nonprofit's leaders had been advocating for Minnesota to crack down on annual percentage rates.
After receiving a $500,000 boost from the state this year, Exodus will be able to help more people in need, executive director Anne Leland Clark said. As she scrolled through the nonprofit's surveys of people who used payday loans, she said the phrase "never-ending" appears again and again.
"'It helped before it hurt.' Every single person says some version of that," she said.
While Minnesota has strong protections to prevent companies from evading the new requirements, Farahi suggested lawmakers might want to consider additional legislation similar to what Colorado recently passed. That state, which capped interest rates at 36% five years ago, took another step this year to prevent high interest rates on Colorado residents from out-of-state banks.
Having banks from different states operating in Minnesota can complicate things, said Max Zappia, the Commerce Department's deputy commissioner of financial institutions. He urged people to contact the agency's enforcement division with loan concerns.
"If a consumer has a loan with an unlicensed and illegal lender, those debts are not collectible," Zappia said. "So they should really look into, if they feel like they've taken out a loan with a disreputable lender, whether or not they are actually in debt."
He called Minnesota's new law "an effective measure against the current kind of payday lending that we're seeing out there."
On Thursday morning, Mattie Pitchford joined a steady stream of customers at the ACE Cash Express on University Avenue in St. Paul. She has used the company for various financial services, including payday loans in the past, and said she hasn't struggled with the high interest rates.
"I always pay them off," she said. As of Thursday, ACE Cash Express — the state's second-largest payday lender last year — still offered the loans. Once that service stops, Pitchford said, "I don't know where I'd go."