The state of Alabama is inching ever so closer to reforming the payday loan industry.
Alabama Senators voted 28-1 in favor of a bill that would give borrowers more time to repay their “cheap payday loans”. Republican State Senator Arthur Orr, the legislation’s sponsor, explained that the reform would “decrease the punitive nature” of the state’s payday loan business model.
Instead of having a few weeks to repay their short-term loans, the bill would allow borrowers up to six months to repay the loan. This would prevent consumers from having to face large fees to renew their loans when they’re unable to pay within the allotted time. Also, the bill would require payday loan stores to accept installment payments as opposed to one big lump sum.
The bill does not impact the title loan industry.
Legislation now moves to the Alabama House of Representatives. If approved in the House then it would be placed on the desk of Alabama Governor Robert Bentley, who would likely sign it into law.
In Alabama consumers pay a flat fee of up to $17.50 for every $100 borrowed for an agreed period of 10 to 14 days. Proponents say it helps the impecunious, adding that it costs a lot of money for businesses to lend money to high-risk customers. Critics say it puts the poor into vicious debt cycles and places them at a significant disadvantage.
What does the state’s payday loan industry think about the reforms?
Max Wood, president of Borrow Smart Alabama, told the Montgomery Advisor that changes would have a negative effect on the industry, and prompt borrowers to use unscrupulous online lenders.
Likening the legislation to what happened in Colorado, Wood believes a lot of stores would shut down – 200 licensed payday lenders closed their doors in Colorado last year.
“There are approximately 400,000 Alabamians who use this service,” said Wood. “They have two choices. They can go to local storefronts, or they can go to the Internet.”
In 2010, Colorado policymakers passed similar legislation that would place restrictions and reforms on the payday loan industry. This led to a drop in payday stores by 50 percent.
Nevertheless, advocates for low-income Alabama residents say the bill is a step in the right direction. Shay Farley, legal director of Alabama Appleseed, explained that the reform isn’t exactly what she would’ve liked, but it’s still an improvement from what it had before.
“It’s not the bill we would’ve written for borrowers, or the approach we’ve long advocated for, but it’s a major step toward meaningful relief for borrowers,” said Farley in an interview with the Associated Press. Farley’s group wanted, for example, a 36 percent APR cap on the loans.
According to data from the Alabama Banking Department, an average of 40,000 payday loans were taken out each week in the state in 2015. The data came to light when the organization started to track payday loans as part of a database to enforce current payday loan laws.
If the current bill succeeds then perhaps Alabama consumers will see the amount of fees charged drop by one-quarter, much like what’s unfolded in The Centennial State in 2013.