Last week, the Montgomery City Council approved a moratorium on the issuance of new business licenses for payday loan businesses, following in the footsteps of 11 other cities – including Anniston, for a time – in the state that have done the same. The concern is about how payday loan services might be hurting the local economy and residents.
Payday loan businesses, along with check cashing and title pawn shops, offer quick cash to residents in need of assistance, but at relatively high interest rates. Some consumer and poverty protection advocacy groups say such businesses hurt local economies, prey on low-income residents and need more regulation. However, members of the payday loan industry disagree, saying they provide a valuable service to people with fewer lending options.
Anniston finance department records show there are 32 payday loan, check cashing and title pawn businesses in the city. Of those, 25 are payday loan stores. Records show the city had about 15 payday stores in 2007, when the City Council declared a six-month moratorium on new payday lenders.
How it works
Payday loan stores offer money based on a person's income, while title pawn businesses hold a customer's car title in exchange for a cash loan. In Alabama, both types of businesses are allowed to charge between 300 percent and 400 percent annual interest rates on the loans. However, such businesses do not require customers to have good credit or bank accounts to use their services, unlike traditional banks.
Check-cashing businesses charge a fee for cashing payroll or other kinds of checks.
"The appeal of these businesses is they have no credit check requirements, which makes financing more accessible to people without such regular access," said Gary Hoover, professor economics at the University of Alabama and a member of the Institute for Research on Poverty in Wisconsin. "But ultimately they hurt people more ... the rates charged are extremely out of line with traditional bank rates."
Shad Williams, president and CEO of Cheaha Bank in Oxford, said his bank offers small loans similar to those payday business, but at much lower rates. Williams said his bank charges about 17 percent annual interest on a $500 loan. Payday loan businesses are limited by law to making loans of no more than $500 per customer.
"We actually lose money on that," Williams said. "Though 17 percent sounds like a lot, it would be about $85 a year."
Williams noted that to get such a loan, a customer must have good credit and have an account with the bank.
A high cost
According to a study released in March by the Insight for Community Economic Development, payday lending establishments cost the U.S. economy $744 million in 2011, resulting in a net loss of more than 14,000 jobs. The study shows that for Alabama, the state economy lost approximately $47.7 million in 2011 due to payday loans.
The study states that though payday lending generates some economic activity, those gains are less than the resulting losses, since the high interest rates reduce household spending.
The Insight Center is a California-based national research, consulting and legal organization that focuses on issues facing low-income communities.
The Federal Trade Commission suggests residents refrain from using payday loans if possible. According to its website, the FTC recommends residents try to find an alternative to payday loans, such as through a credit union or negotiating with creditors. The FTC also recommends that if a resident must use a payday loan, he or she should try to borrow only as much as can be covered by the next paycheck.
Max Wood, president of Borrow Smart Alabama, a volunteer organization of 400 lenders in the state that works to educate consumers about payday lending, said his industry provides a valuable service for many residents who have few options. Wood said that while 400 percent interest sounds high, it equates to about $17.50 per $100 loaned. Compared to other fees that a consumer might incur, such as a $35 overdraft from a bank or a $300 fee from the power company to get electricity turned back on after disconnection, payday interest fees are not that burdensome, Wood said.
"The people using our services are not stupid," Wood said. "They know we are the most economical service available ... that's why the industry is in high demand and why you see so many stores."
Hoover, however, agreed with the idea that payday loan businesses hurt local economies, especially since residents who use such services tend to use them more than once. For example, if a person is paying $10 per month in fees per year and 100 people in that community are doing the same, the costs start to add up, Hoover said.
"That's a lot of money being siphoned out of the economy," Hoover said.
Stephen Stetson, policy analyst for Alabama Arise, said studies show that while many people start off using a payday loan to cover an emergency, the high interest rates keep them from catching up with their bills, pushing them further into debt. Alabama Arise is a non-partisan group that advocates for low-income residents.
"What the data shows is many of these people have gotten so underwater in their finances that they start using loans to cover basic expenses like light and water bills," Stetson said.
Stetson said Alabama Arise supported two bills in the state Legislature earlier this year that would have capped interest rates for payday and title loans at 36 percent. Both bills failed to make it out of committee due to lobbying efforts by the payday industry, Stetson said.
Wood said such an interest rate cap would put payday and title loan stores out of business.
"They wouldn't even be able to pay their power bills on 36 percent," Wood said of loan companies.
Wood said if advocates against payday loans were serious, they would come up with alternatives to them instead of just trying to put them out of business. Wood said that if local payday and title loan businesses disappeared, the people who still need their services would use unregulated online loan services.
Stetson noted that payday and title loan stores tend to bunch together in communities not because there is a high demand, but because that way they can obtain more money from consumers. He said that while each payday loan business is limited to loaning $500 per customer, there is no database on who has such a loan at any given time.
"They take advantage of people who can walk from store to store," Stetson said. "People are doing that 10 or 11 times, borrowing way more than the $500 limit."
Jamie Fulmer, senior vice president of public affairs for Advance America, one of the country's leading payday lenders with approximately 2,600 locations in 29 states, said that customer satisfaction for his company's services, however, are extremely high.
"Customers express their voice every day when they choose a payday," Fulmer said. "Our products are simple and as straightforward as can be."
Fulmer said that in Alabama, Advance America stores operate under the state's regulations and are audited regularly. Fulmer added that Advance America's customer base is not low-income, but are instead middle-class residents making a median income of $54,000 a year and who are not abusing the system by taking out multiple loans.
"These are good, honest, hard-working folks who just got caught between paychecks with an unexpected expense," Fulmer said.
Staff writer Patrick McCreless: 256-235-3561. On Twitter @PMcCreless_Star.