Alabama critics want to cap payday loan interest rates at 36%

Earlier this year, the Alabama state government approved a payday loan reform bill that was considered weaker than initially proposed. Moreover, this is irking many people who have opposed the industry.

For instance, the legislation, which was passed by the House Financial Services Committee and the Alabama Senate, restricts payday lenders to make loans at 15 percent for at least 28 days, which is a lot higher than what reformers had demanded. Another aspect of the weakened payday loan reform bill is that it does not allow borrowers to pay off the loans in installments, which, critics say, sends low-income borrowers into a never ending cycle of debt, a common concern in the state of Alabama.

The payday loan industry argued that the initial legislation would have led to an “extinction event” for the entire sector, something that many Alabama consumers rely on when they get into financial trouble.

In response, the Alliance for Responsible Lending in Alabama (ARLA) wrote that credit is needed, but the industry needs to be reined in since it acts as an “engine of poverty” across the state and the country.

“We all want the world where people can get the kinds of credit they need,” the organization wrote in an op-ed in April. “But that requires putting some brakes on a system that all too often acts as an engine for poverty, handing out extremely high-cost loans to desperate folks who may treat them as a lifeline. Too often, those ‘lifelines’ instead end up as anchors, dragging people into financial quicksand.”

After South Dakota had voted on Election Day to cap interest rates at 36 percent, there is another movement being formed in Alabama to adopt the same measures and policies as the state did earlier this month.

A consumer lending task force is looking to apply stricter regulations on businesses who offer same day payday lending services. The area that is generating the most attention is interest rates, which can surge as high as 400 percent.

It is being recommended that the issue goes to voters, who can either give the thumbs up or the thumbs down to a 36 percent cap on interest rates for short-term, high-interest loans in Alabama. This recommendation will be sent to the Governor’s Office for consideration. A decision will be made ahead of the February legislative session.

Payday loans are popular in the state. It has been estimated that Alabama consumers took out 2.4 million payday loans in 2015, and the numbers continue to be staggering to so many experts.

Critics of payday loans say that these alternative financial products negatively impact low- and middle-income consumers who enter into a debt trap. Many public officials and consumer advocacy groups have encouraged serious reforms that can limit or restrict payday loans across North America and Europe.

Meanwhile, proponents of payday loans say these are necessary alternative financial services because many of the users do not have access to traditional forms of credit and banking options. Without payday loans then they may not be able to keep the lights on, cover the rent or repair the broken down car.

Although the Consumer Financial Protection Bureau (CFPB) unveiled a national regulatory framework for the payday loan industry, some argue that president-elect Donald Trump could kill both the proposal and the CFPB during his time in office.

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