Our firm deals with litigation involving “defective products” on a regular basis, and most of these cases involve motor vehicles. But there are two products on the market in Alabama and in other states that fit the description of “defective” and are hurting thousands of folks. Those “defective” products are payday loans and automobile title loans. In my home state of Alabama, the Legislature badly needs to rein in these faulty, yet all-too-often “legal” products. These two lending products, without question, are damaging Alabama consumers who use them. Based on our firm’s involvement in predatory lending litigation, I know first-hand that Alabama’s laws on both pay-day loans and title loans are very weak.
The lending industry, including banks, credit unions and finance companies, consider loans as “products,” each with its own varying characteristics. Such things as amounts, target audiences, repayment plans, and the like are involved with the products and vary insofar as these elements are concerned. Of the “loan products” on the market today, payday and title loans are the ones that in my opinion are the most hurtful. A person with a financial emergency is often forced to take out a loan using another product, a car, as collateral. Alabama law allows a person to pawn their car title in exchange for a loan, which will vary in size depending on how much is needed and the value of the vehicle.
This type transaction is legally the same as pawning a product such as a watch. If a loan secured by a watch is not paid back, a working man or woman will still be able to drive to work the next day. He or she would lose the watch but they would still have their car. But defaulting on a title loan is quite different. In a title loan, default results in repossession of the borrowers vehicle. As a result, default on a title loan by a worker puts the worker’s paycheck in jeopardy. There is also the matter of the cost of these title loans. Any person desperate enough to pawn the title to their vehicle is punished for that vulnerability by being charged a staggering 300% annualized percentage rate. Compare the Annual Percentage Rate (APR) associated with other kinds of consumer loans to the APR on a title loan. You will then see how bad title loan rates are.
The absurdity of triple-digit interest is why a number of states and the U.S. military have capped rates on these types of loans at 36%. While this is still very high, it’s considered “reasonable” by some observers. But one thing is certain: the only winner when it comes to payday or title loans is the lender. Nobody wins when borrowers get pulled into the inescapable financial quicksand of a title or payday loan – except for the lender and the owner of the used car lot where the repossessed car will be sold.
But let’s also take a look at payday loans. A title loan’s 300% APR looks good compared to the 456% legal interest rate in Alabama on payday loans. These loans are for very short terms, but carry astronomical interest rates. There are also huge fees each time the loan is rolled over. Purporting to throw borrowers an emergency lifeline, it was written in an article in the Montgomery Advertiser that these loans actually throw the borrowers an anchor. The average borrower takes out eight or nine such loans a year. Instead of solving emergencies, borrowers often use payday loans for recurring regular expenses and that is a sure path to destitution.
Payday loans are designed to encourage repeat borrowing. Barring some kind of windfall, a person in desperate need of funds for an unexpected expense is unlikely to have the money a few weeks later. When time to pay comes the loan is rolled over and the deadline extended. The cycle — with another round of fees – is then repeated. Only a handful of borrowers pay off the payday loan as soon as they reach their next pay period. Industry documents show that lenders recognize the vast profitability of cultivating repeat borrowers. In fact, payday and title loans may be the only defective products that work exactly as designed. We have seen actual internal documents from a supervisor for one lender who said to the employees: “Get them in debt, and keep them in debt.” The company actually laid out specific instructions on how to lure folks into their trap and to keep them there.
Hopefully, the Alabama Legislature will consider bills in the regular session to curb these lending practices. Alabama could join other states like Arkansas, Georgia and North Carolina in capping interest rates on small-dollar consumer loans. Usury isn’t just unethical, it strips wealth out of communities at a time when elected officials have been adamant about protecting working families from economic distress.
The Alabama Legislature should take a strong stand – and resist the powerful lobbyists – and make needed changes in our state’s laws. But outcry from consumer advocates won’t be enough to move Alabama’s political machinery — especially when the well-funded payday and title loan lobby is pushing in the opposite direction. Many folks who don’t even use payday loans still consider usury as “evil” and they don’t like to see storefronts clustered along Alabama roadways and in our cities and towns.
If the public would take a stand, its voice would be sufficient to push the Alabama Legislature into leveling the lending playing field. The legislators might even take these “defective loan products” off the market once and for all. My preference would be to ban “title loans” and to put a reasonable cap on the interest rates for “payday loans.” Hopefully, our Alabama readers will see a need for “citizen involvement” and contact their House members and Senators and ask them to take action.
Source: Montgomery Advertiser
Contact us today for a free legal consultation with an experienced attorney.
Fields marked *may be required for submission.
If you would like to subscribe to the Jere Beasley Report digital edition, simply visit our Subscriptions page and provide the necessary information or call us at 800-898-2034.
Attorney Advertising - Prior results do not guarantee a similar outcome.