There was a lot of negative talk about payday credit and title loans during the last session of the Alabama Legislature. Some lawmakers proposed placing interest-rate caps on these short-term emergency loans, while other proposals would have placed a raft of new restrictions on the industry. The bills, however, did not pass, showing that our state legislators understand the negative impacts the proposed changes would bring.
Unfortunately, some advocacy groups in our state are trying to convince local leaders that they should help ramp up support for bills in the 2015 legislative session. These bills would only serve to cost thousands of jobs and drive up the cost of loans to consumers.
Let me tell you why these bills are a bad idea.
The bottom line is that many payday and title lenders across Alabama will be put out of business by these proposals. The average profit on a payday loan in Alabama is just $3, so you can see why interest-rate caps and other new limits will effectively shut down many storefronts in the state. When that happens, our cash-strapped customers — mostly hard-working, middle-class people from across Alabama — will have few options when suddenly faced with an expensive car repair or an unexpected medical bill.
Exactly where will these people find help in an emergency? They can’t turn to a traditional bank because banks don’t make small-dollar loans. If these consumers have a bank account or credit card, they will have to be careful to avoid late fees or overdraft charges, which run on average about twice the $17.50 charge on a $100 payday loan. Another alternative for cash is an unregulated Internet lender, but transactions with these firms, some of them located offshore, can pose big dangers for ordinary consumers.
The fact is that short-term loans represent a cheaper alternative for many individuals. No less an authority than the Federal Reserve Bank of New York backs me up on this. Researchers at the New York Fed carried out a study that showed that after a ban on payday loans, households in Georgia and North Carolina bounced checks and filed Chapter 7 bankruptcy at rates higher than households in states that permitted the loans. This study concluded that payday credit is preferable to many substitutes.
While I don’t doubt the sincerity of the people advancing the idea of limits on payday credit, I want to make sure that it’s widely understood that these measures will trigger unintended consequences that will actually harm many consumers. Our customers will tell you the need for cash in emergency situations is not going to disappear overnight. But if interest-rate caps and new limits on short-term loans are adopted, the availability of payday advances and title loans will be greatly diminished across Alabama as storefronts close.
Simply put, that means a great many people will find themselves with few options to get the short-term cash they need the next time they are facing a crisis. And when there is no way to pay for the repair on the car that takes them to work every day, just what are they supposed to do?