MONTGOMERY — The Alabama Senate voted 28-1 Tuesday in favor of a bill that would reduce the cost of payday loans and give borrowers more time to pay them back.
“A $500 loan in Alabama is much more expensive than it is in our contiguous states,” said Sen. Arthur Orr, R-Decatur, the bill's sponsor. “And why is that? Because we allow it.”
Orr's bill would allow people who take out payday loans — short-term, high-interest loans — to pay them back in installments over a six-month period. It also sets up a new pay schedule for payday lenders that would limit them to the equivalent of 120 percent annual interest on any loan.
That's not how the system works now. Payday lenders, who typically work in low-income communities, offer loans with a term of less than a month, for amounts of $500 or less. Each loan comes with a fee that “rolls over” — accumulating another fee — if the loan isn't paid back on time.
Opponents of payday loans say a borrower can easily rack up 450 percent interest on a payday loan over a year. There's been widespread interest in further regulating the loans in both houses of the Legislature, though opponents of regulation — some of whom have campaign funding from the loan industry — have blocked past bills in committee.
Orr said his bill, modeled on a system adopted in Colorado, is a compromise that would allow the payday loan industry to survive while making the interest on the loans more reasonable for the borrower.
“It allows the industry to continue and allows them to provide a product that a lot of people rely on,” Orr said.
Few in the Senate have come out openly against the bill, though several offered alternate proposals that they said would be more politically realistic. Sen Gerald Dial, R-Lineville, offered a bill that would change the installment-pay provisions of the bill, claiming Orr's bill would create confusion with an existing law, the Small Loans Act.
“You're basically going to do away with the payday loan industry in this state,” Dial said. He said Orr's bill, unchanged, would never pass the House.
Orr claimed Dial's amendment would leave borrowers with their original $500 debt even after paying loans back on installment. The Senate defeated Dial's amendment, as well as an amendment by Sen. Bobby Singleton, D-Greensboro, that would have allowed loans of up to $1,500, higher than the current $500 limit.
“I know we need to do something with this industry,” Singleton said. He argued that poor people still need access to sometimes larger amounts of money.
“There are a lot of people out there who are not bankable,” he said.
One advocate of payday loan reform said the bill was a step in the right direction, but just a step. Shay Farley, a lawyer for the group Alabama Appleseed, said the organization wants a 36 percent limit on annual interest, but has been told repeatedly by lawmakers that they have to compromise.
“Sen. Orr's bill isn't perfect, but it's a step toward affordability,” she said.
The bill heads to the House for consideration.