For those who don’t know about payday loans I will try and give a brief explanation. Payday loans allow individuals to borrow money by using a post-dated check as collateral for a cash loan. Unlike most other forms of credit, to qualify for a payday loan a borrower need only provide proof of income (such as a paystub or verification of government benefits) and a bank account. Payday lending is a huge business in Alabama, with around 4 million transactions occurring annually at storefront locations and more than 300,000 Alabamians taking out loans. Indeed, there are four times as many payday lending storefront locations throughout the state as there are McDonald’s restaurants. On the whole, Alabamians take out an average of $15 million in payday loans each week.
You may be shocked to learn that current Alabama law allows payday lenders to charge up to 456 percent interest, in addition to a $17.50 service charge per $100 borrowed, for a two-week period. The law prohibits people from taking out a total of more than $500 in loans at one time, regardless of the number of loans used to reach that debt limit. In theory, these types of loans are designed to help people meet a small, one-time expense, yet in practice most payday loans are taken out to pay for previous loans. More than three quarters of all payday loans are given to borrowers who are renewing a loan or who have had another payday loan within their previous pay period. Among all borrowers, more than 80 percent conduct multiple transactions each year, and 60 percent of all payday loans go to borrowers with 12 or more payday lending transactions each year.
According to the Consumer Federation of America, the use of payday loans doubles the risk that a borrower will declare bankruptcy within two years, doubles the risk of being delinquent on credit cards, and tends to trap consumers in a perpetual cycle of debt. The average payday loan borrower in Alabama is trapped in debt for five to seven months of the year due to the high cost of these loans. If a borrower takes out $300 and the interest is due biweekly, the loan would cost between $575 to $785 in interest payments alone. It is not surprising that payday lenders tend to set up shop in low-income areas, where they will have the greatest chance of issuing loans to borrowers who cannot immediately pay off their loans and will incur sky high interest fees.
The problem represented by predatory payday lending practices has been nationally recognized. Many other states have banned payday lenders from charging these types of triple-digit interest rates, and 16 states and the District of Columbia have essentially banned payday lending altogether. In 2006, Congress enacted the Military Lending Act, which caps interest rates to service members and their dependents at 36 percent and prohibits loans based on the holding of postdated checks or future debit authorization. While Alabama is arguably behind the curve, the state is starting to reel in industry excesses.
In August 2015, the Alabama State Banking Department began keeping track of all payday loans in a centralized database. The purpose of this database is to enforce the existing law prohibiting borrowers from taking out more than $500 in payday loans at one time. Prior to the creation of this database, the $500 limit was essentially unenforceable because borrowers could take out loans from multiple different lenders simultaneously. While borrowers are still allowed to obtain loans from multiple lenders, the new database ensures that the cumulative value of these loans does not exceed $500. Not surprisingly, payday lenders sued Alabama’s Banking Department in 2013 to block the utilization of this system, but the Alabama Supreme Court ruled in favor of the state early last year. Since its creation, the database has blocked several thousand loans because they would have put borrowers over the $500 cumulative limit. If you need more information on this subject, contact Grant Cofer, a lawyer in our firm’s Consumer Fraud and Commercial Litigation Section, at 800-898-2034 or by email at Grant.Cofer@beasleyallen.com.
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