Should Montgomery Stop Payday Lending?

Title lender on Fairview Ave.

It’s amazing what you can find in your blind spots.

I’ve driven past payday lending storefronts for what feels like my entire life (actually they’ve only been around since the 1990s), but until recently, I had never even given a second thought to what goes on in those shops. Sure, the signs say “loans,” but I’ve never (knock on wood) been hard up enough to need to wander into the sketchy-looking places promising “fast cash” and “easy money.” So, who cares what goes on in there? Isn’t that just between the lenders and whatever folks are desperate enough to sign a contract with them?

Actually, like a lot of things, it’s complicated — and the research is really clear on this point: Those stores are hurting our community.

It turns out that those loans are incredibly expensive. That may come as no surprise to anyone with a lick of sense, but you might raise an eyebrow at just how expensive. Payday lenders are legally allowed to charge 456 percent interest — and all of them charge it. This isn’t one of those things where competition drives down prices. You’d think that since they all cluster together up and down almost every major road in Montgomery that one of them would start making cheaper loans in hopes of attracting bargain-seeking customers. Nope.

In fact, customers of payday loans (and their awful cousins, the auto title loans) aren’t shopping at all — they’re desperate for some fast cash to fix an emergency expense. They aren’t looking for a good deal, they’re looking to keep the lights on, or pay a medical bill, or get their car out of the shop, or any of the other things that can be explained with the two-word phrase, “Life happens.”

But when someone is grasping for a financial life preserver, it turns out that these loans are actually throwing them an anchor. The studies are very clear on these points: The average payday borrower ends up taking out 8 to 10 of the loans per year, lining the lenders’ pockets with a catastrophic amount of interest and fees. It happens because borrowers usually can’t pay back hundreds of dollars at the end of the two week loan term — so they elect to roll their loan into another loan, a practice the industry calls “churning.” Borrowers typically spend more than 200 calendar days of the year in hock to the lender, often drowning slowly on the way to bankruptcy court.

These facts may be news to the average folks that zip by payday and title lenders every day, but they aren’t surprising to a lot of folks in other states where they’ve effectively banned these kinds of loans. Think 456 percent interest is obscene? Well, in North Carolina, Georgia and Arkansas they did too, and those states have capped interest rates on these kinds of small-dollar loans. Needy borrowers in those states manage to get credit from reasonably priced sources and life goes on there without the kind of usury that we allow in Alabama.

Why am I mentioning all of this? Well, it turns out that Montgomery knows it has a problem with these kinds of lenders. The City Council is looking at putting a moratorium on issuing business licenses to any more of them. That’s a good thing too, because payday storefronts drive down property values. Just like nobody wants to invest near a sex parlor, liquor store or tattoo shop, nobody wants to be near the place that gouges poor people in their neediest hour. Oh, and usury is forbidden in dozens of places in the Bible. You don’t hear the payday loan industry respond to that very often.

But other than that inconvenient fact, the payday industry does like to respond to criticisms of their loans — and are likely to be out in full force at the city council denouncing the “anti-business sentiment” that seeks to curb their spread. They claim to be providing a needed service to borrowers who are too big of a credit risk to get loans at mainstream banks and credit unions. Sadly, there is some truth to their claim that there are some folks out there that don’t qualify for traditional loans — and mainstream banks don’t want to do costly underwriting for small-dollar loans.

But other states that have capped interest rates (as well as the U.S. military) knew that the damage of payday and title lending outweighed whatever minor benefits they might provide to the customers that use them. It’s not just the borrowers that are hurt — it’s the whole economy. One recent study (PDF) showed that every dollar spent paying back a payday lender takes an additional $1.94 out of the economy due to reduced household spending. Payday lending costs the United States $774 million each year, nearly $48 million of that damage coming in Alabama. Excessive consumer debt impairs job growth and breaks up families.

We usually stay away from politics here at Midtown Montgomery Living, but this is a simple matter of improving our community. And it’s a non-partisan issue: The Federation of Republican Women is rarely on the same side as the Southern Poverty Law Center, but this is one topic they agree on. Getting payday and title lending out of Alabama isn’t going to solve poverty, but it’ll reduce one of the factors that amplifies financial desperation.

If you’re interested at all in this matter, your voice will absolutely make a difference on Sept. 3 at the Montgomery City Council meeting. It’s far from a done deal, and you can expect serious industry opposition to the proposed moratorium. But other Alabama cities are taking the hint: Birmingham, Decatur, Irondale, Trussville, Center Point, and many others are starting to use city powers to rein in the predatory menace posed by high cost payday and title lenders. One way to invest in your community is to take steps against those that are stripping wealth out of it. Ultimately, it’ll be up to the state legislature to deal with the unconscionable interest rates charged by these lenders, but Montgomery could join the trend of reformers by making a public statement against these legal loan sharks.

Here’s hoping that you’ll come add your voice to the chorus.

The Montgomery City Council will consider a moratorium on payday and title lending on Tuesday, Sept. 3 at City Hall (103 N. Perry St). Work Sessions are held in the Mayor’s Conference Room (204), while the actual council meetings are held in the Council Chamber (Room 142) at 5:00p.m. All meetings are open to the public. For more information about attending City Council meetings, contact the City Clerk’s Office at 334-625-2096.

Editor’s note: The author works for a non-partisan anti-poverty non-profit group here in Montgomery that has been involved in the struggle over predatory lending in Alabama. The views expressed here are, as always, his own. MML has reached out to representatives from the payday loan industry to invite a response to this piece.

Kate and Stephen are Midtown residents with two cats, a dog, four fish, a garden, an old house and a sense of adventure. They write about life in Midtown here and about life in Montgomery at their blog Lost in Montgomery.

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There Are 8 Brilliant Comments

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  1. Bill Gilliland says:

    Very good article. This is an important issue that effects more than the borrowers. Big banks back up these companies and pour money into these loans instead of lending money to small business (at much lower rates).

    When these people say they offer a “service”, it should be noted that NO financial advisor, NO investment counselor, NO credit counselor in the history of the world ever said “First, let’s go borrow some money at 456% interest!” As your story states, these loans are the same as throwing a drowning man a boat anchor.

    These people are THIEVES. STOP THE THIEVES IN YOUR NEIGHBORHOOD!

  2. Jay Croft says:

    At least one or our U.S. Senators is known to have heavy ties to this “industry.”

  3. Langan says:

    Why mention the Bible? Seemed like an interesting article until then. For those of us who see it as a beautiful work of literature, inserting this into an article on payday loans seems like a desperate attempt to get the Christian crowd riled up. What’s next? Burning books? Puhleese.

    • Stephen says:

      Lanagan, I mentioned the Bible because a lot of people look to it as an important moral and ethical text. Lending and usury are mentioned several times in the Bible, so it is relevant to the case against predatory, high-interest loans to mention that they are forbidden by one of our society’s most important holy texts.

  4. Dale Evans says:

    As a payday lender, albeit located in Canada, I’m happy to respond. When you state that payday loans are hurting your community, what is more harmful: receiving a payday loan or defaulting on your mortgage, failing to pay an electricity bill, or feeding yourself and your family? Even though you have been fortunate enough to never have been “hard up enough to need to wander into the sketchy-looking places,” why would you wish to restrict the rights of other citizens to take care of themselves?

    I agree that, like all industries, payday lenders have at times been excessive and have gone beyond the pale in their practices. This is an argument for regulation, and not for the wholesale banning of payday lenders.

    What your article fails to articulate is any means of dealing with the demand for short term credit that payday lenders address.

    • Stephen says:

      Dale, thanks for reading and commenting. Nobody wants a world where people can’t get credit. The question becomes how best to provide that credit. It sounds like you concede that some regulation is needed, which is a good place to meet in the middle. We can all agree that 456 percent is usury.

      Many states have capped interest rates at 36 percent, which is a fair regulation and still allows lenders to make a profit on what can be high-risk loans. Georgia, Arkansas and North Carolina are just three of the 17 states that have recognized the problems caused by these loans. Nobody advocates “banning” payday lending. But if payday lenders leave Alabama in a world where rates are capped, other more reasonable sources of credit spring up. That’s what happened in other states and that’s what would happen here.

  5. OC says:

    Jay Croft: At least one or our U.S. Senators is known to have heavy ties to this “industry.”

    +++

    Richard Shelby, I presume?

  6. OC says:

    City of Montgomery puts moratorium on title pawn, payday loan businesses:

    http://blog.al.com/montgomery/2013/09/city_of_montgomery_puts_morato.html

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