Can Consumers Really Pay Off Their Payday Loans?
High rates can create a debt trap for consumers who struggle to pay their bills and take out payday loans.
The latest effort to cut interest rates charged by Alabama payday lenders was passed by the state Senate on Thursday, but not without parliamentary drama.
The upper house on Thursday voted 20-4 for a bill sponsored by Sen. Arthur Orr, R-Decatur, which would increase the repayment term on short-term loans to 30 days. Bill moves to the House, where, Orr noted, previous attempts to overhaul payday loans have failed.
“We’re halfway there,” Orr said. “But the most difficult mountain to climb awaits us.”
Payday loans are short term loans that extend for 10 to 31 days and can carry interest rates in Alabama of up to 437 percent APR. Critics say people who take out a loan often find themselves taking a second loan to pay off the first, trapping them in a cycle of debt. Industry representatives claim that they provide loans to people who may have difficulty obtaining them.
Efforts to change the laws have come up against a wall of lobbyists retained by the industry. Those seeking to change the laws – who at one point wanted a 36% APR cap on loans – have failed. The Alabama State Banking Department established a central database in 2015 where payday lenders are required to submit reports. The industry sued to shut down the database, but ultimately failed.
According to the department, more than 214,000 people had payday loans last year, the majority of them having taken out four or more loans.
Orr’s bill would require all loans to be for 30 days, which he said would reduce the APR on loans to 220%.
The bill was the subject of an hour of filibustering in the Senate by Senator Tom Whatley, R-Auburn, who argued that the new terms would force some payday lenders to close. Whatley repeatedly read the first names of people he said worked in payroll stories in the state.
“If they go bankrupt, and I claim they will, you’re going to ship (customers) to overseas accounts,” he said.
Orr said if that happened, employees could find new jobs, citing Alabama’s unemployment rate of 3.5% in December.
“Just believe me not everyone will go bankrupt with a 30-day payback period,” Orr said.
Before the bill escaped the chamber, it underwent a series of parliamentary detours. After passage, Orr proposed to block a second vote on the bill, a motion which failed in a tie. A motion to reconsider the vote barely fell through on a 14-13 vote, sending the bill to the House.
“The House committee was the Bermuda Triangle out of which no payday loan reform bills came out,” Orr said.
Speaker Mac McCutcheon R-Monrovia said on Thursday that he had “no doubt that there would be a healthy and heated debate if he stepped out of the committee and spoke.”
“People came to me and said, ‘Mr. President, if you take that away, I’m a person the banks won’t lend money to,'” he said. “Then you talk to people who have been taken advantage of with the high interest rates and penalty fees, and they’ve found themselves in a position where they can’t pay. There are pros and cons. about this we need to address. “