Payday lending reform: Ending a debt trap in Alabama

Payday loans allow borrowers with a bank account to use a check dated in the future (usually two weeks later) as collateral for a cash loan. To qualify, all a person needs is proof of income (a pay stub or verification of government benefits). Research shows the payday lending business model is designed to keep borrowers in debt. Borrowers who receive five or more loans a year account for the large majority of payday lenders’ business, according to research by the Center for Responsible Lending.

Each $100 borrowed through a payday loan in Alabama carries a “loan origination fee” of up to $17.50, and those charges occur with every renewal of the loan. With a 14-day loan period, this works out to an annual percentage rate (APR) of 456 percent. Loans that a customer cannot pay off entirely on the due date are rolled over, with no wait required for the first rollover and only a 24-hour wait required before the second. At triple-digit annual interest rates, even a short-term payoff for a payday loan can take a big bite out of a borrower’s bank account.

Struggling Alabamians are common targets of payday lenders. Payday lenders are located disproportionately in low-income neighborhoods, especially ones with large black or Hispanic populations. Lenders often target seniors, people without a high school education, and families who are likely to be living from paycheck to paycheck. This fact sheet by policy director Jim Carnes and policy analyst Dev Wakeley highlights the pitfalls of payday loans in Alabama and offers policy solutions to address them.

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