Alabama has a law against  loan sharks moneylenders who charge high interest rates on loans. Yet a bill now before the Alabama Legislature would allow  payday lenders to attach high charges to small loans  charges that would amount to more than 10 times the interest allowed by law. The bill would provide a loophole for payday lenders, changing the legal definition of their business from  lending   to  deferred presentment   of personal checks. The result? Payday lenders would be exempt from the rules governing traditional lenders.



Here's how payday lending works:

1) A customer writes a personal check for the desired cash, plus a fee for the lender. The borrower and lender both know

the borrower has insufficient funds to cover the check.

2)The lender advances the cash and keeps the fee  usually about $20 per $100 borrowed.

3) The lender also holds the check for two weeks or until the borrower is next payday. On that date, the customer can either redeem the check with cash or allow the check to be deposited.

4) If the borrower cannot cover the check, the lender collects another fee and holds the check for another two weeks. This

is called a  rollover. 

Under the federal Truth in Lending Act, the cost of loans must be disclosed as both a finance charge  in this case, the $20

fee every two weeks  and as an annual percentage rate (APR), the standard cost of credit to the borrower on an annual basis. If payday lenders complied with this standard, the APR on a payday loan would range from 390% to 1,000% or more!

No wonder the payday loan industry is growing so fast. According to Stephens Inc., an investment firm that does research for investors, payday loan firms enjoy a 48% unleveraged return on investment, assuming a 40% tax rate. More than $10 billion a year in payday loans are made nationally through 8,000 to 10,000 stores.

Payday lenders portray themselves as  mom and pop   business owners, but in fact they are part of a giant industry

dominated by chain stores. The four largest payday lenders  Advance America, Check N Go, ACE Cash Express, and Check Into Cash  have more than 500 stores each. Most of these stores are prominently located in low-income or minority communities.

Unfortunately this explosive growth comes at the expense of low-income and elderly people. The convenience and simplicity of payday loans tend to conceal the fact that a payday loan is at least 10 times more expensive than a traditional small loan. Even a cash advance made with a credit card costs only a fraction of the price of a payday loan.

As for pawnshop loans, the borrower can always walk away without redeeming the pawned item. But a payday loan is secured by the borrower is own check. The borrower must pay both the principal and the fees, or face possible prosecution on  bad check   charges. For a household in financial strain, mounting payday loan fees can cause a shortage of money for basic necessities. But the families keep paying, and so the industry keeps growing.

Payday Loans: What Rules Should Apply?

Cost of a $200 loan for 60 days

Small loan company $ 6.00

Credit card advance 8.41

Payday loan (at $17.50) 70.00

Source: Consumer Federation of America

Are payday loans legal?

The Alabama Small Loans Act prevents lenders from charging more than 36% APR on small, short-term loans. The State Banking Department has sued to prevent payday lenders from operating in Alabama, on the grounds that they violate this act. But until the suit is settled, a court injunction permits payday lenders to continue to operate in our state.

Meanwhile, lobbyists have pressured the Legislature to pass Senate Bill 30, redefining payday loans as  deferred presentment   of personal checks. SB 30 would limit fees to $16.25 per $100 borrowed  or 422.5% APR  but the bill is most important effect would be to exempt payday lenders from the 36% usury cap. Alabama Arise and the American Association of Retired Persons have urged lawmakers not to pass this bill.

Why legalize payday loans?

Payday lenders argue that they provide customers with one-time financial aid for emergency expenses. No one would take out a mortgage loan at such rates, just as no one would call a taxi for a trip to California. If they are that rare, it is okay for the loans to be expensive. Yet according to industry sources, the typical customer takes out 11 or 12 payday loans a year, and nearly 40% of borrowers extend their loans past the initial two-week term. One payday loan firm reported that it counts on repeat customers for more than 89% of its business. Some people believe that disadvantaged customers are best served when lenders compete on the open market without restriction. But in reality, the free market doesn it benefit consumers with few real choices and limited knowledge of or experience with borrowing. As investigative journalist Michael Hudson pointed out in Merchants of Misery, getting a loan is not the same as buying a gallon of milk; comparison shopping is more complicated when it comes to credit. That is why payday loan customers, lured in by a smooth sales pitch, often find themselves in a widening spiral of debt.

Payday lenders reply that they are the  lenders of last resort,  giving credit to customers whom no one else will serve. They defend their astronomical fees by implying that low-income customers present a greater risk of defaulting. However, a 1992 study of mortgage borrowers showed that low-income borrowers are actually a better credit risk than wealthy and middle-income borrowers  when they are allowed to borrow on the same terms. Besides, if a customer already has a hard time repaying a loan, is it reasonable to change the rules to make it even harder?

Yet this is exactly what SB 30, the  Deferred Presentment Services Act,   would do. The bill is an attempt to evade Alabama  is existing consumer protection laws. Courts throughout the United States have agreed that payday loans are credit transactions, subject to the same rules as traditional loans. The Alabama attorney general has taken the same position. In response, payday lenders are pushing for special legal rights, redefining the payday loan as a  service   instead of a loan. They have succeeded in Mississippi, Tennessee, and 20 other states. They have not succeeded in Alabama and Georgia.

Payday lenders must play by the same rules as any other small lender. Alabama consumers who are forced to turn to

payday lenders deserve the same legal protections that other borrowers have. But the struggle over SB 30 has little to do with reason and justice, and more to do with political influence. One thing is certain: Even if SB 30 prevails, payday lenders will continue to appear in the Yellow Pages  listed under  Loans.

For more information about Payday Loans in Alabama please visit http://financial-deal.com/faq.html