Payday Lenders: Saviors Or Loan Sharks?
I read an article today where a local Alabama news agency reported payday lenders can charge up to 456 percent in interest. I thought how can this be? After digging through some material I have collected over the years, I discovered that the only way to get to 456% is to keep the loan open for a year … so I thought to myself if someone is looking for short term cash why keep it open for a year and if so are there other alternatives?
Any rational observer would wonder, how in the world can that be legal? Well… it is legal because the initial loan term is for two weeks. Typically one applies for a payday loan online or in a store and expects to repay the paydayloan and interest back in its entirety by the next paycheck. As a service to customers a payday lenders will extend the loan to allow the customer a reasonable time to pay back the loan. As with any loan, the longer you take to pay it back the more interest you incur.
In Alabama, history tells the story.
When John Patterson took office, first as attorney general in the early 1950s, then as governor in 1958 he started cleaning up the problem and worked to open legitimate credit to the working poor.
With Patterson championing it, the Small Loan Act was passed in 1959. Limiting small loans to a few hundred dollars, the legislation aimed to (a.) encourage lending to low-income earners and (b.) prevent exploitation. As the law took hold, it produced legitimate lenders and further strangled the remaining loan sharking operations.
Today, payday lenders use a special provision that allows them to operate outside of the Small Loan law, which caps annual interest rates at 36 percent.
The last vestige of Patterson’s dream was vanquished in 2003, when the state Legislature introduced regulations for payday lending under the Deferred Presentment Act. The Legislature exempted payday lenders from the traditional usury laws, allowing for interest rates equivalent to 456 percent annually. The law also prohibited lenders from loaning more than $500 at a time to one borrower.
So the question to ask yourself,is not “if I need money?”, but for “how long do I need the money?” Look, we have all been there, strapped for cash…no where to turn and along comes an opportunity to get cash quickly, at first the charge seems fair (typically between $75 and $125 for up to $500 for two weeks) then reality sets in and the two week need turns into 3 months …that’s when it starts to hurt.
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