October 19th, 2009

by Kristina Scott

Special to The Anniston Star
10.18.09 – 02:57 am

Like many Alabamians, Laura Williams is struggling to make ends meet.

Laura (not her real name) is a client at Greater Birmingham Ministries, and she took out a payday loan to cover an unexpected expense.

What should have been a simple business transaction quickly turned into a nightmare. Laura says the payday lender harassed her even before the loan was due — and worse, after she paid off the loan, the lender continued to make withdrawals from her bank account. Luckily for Laura, she did not have to close her back account to stop the payday lenders from withdrawing her funds, but this is not the case for everyone.

Another Greater Birmingham Ministries client, Mary Wright (also not her real name), has taken out up to five payday loans at once. Without a central database, payday lenders cannot determine how many loans a potential borrower has taken out or whether she will be able to pay back the loan in a timely manner.

Mary says she took on extra work to try to keep up with her expenses and pay off her debt, but she is ensnared in the payday loan trap and has fallen behind. She defaulted on her gas bill and cannot keep up with her other expenses. The stress is so bad that she and her partner nearly separated.

These are just two stories collected by Alabama Appleseed and service providers around the state in an effort to document consumers’ experiences with payday lenders.

What they found is that while payday lending sounds like a good short-term solution to a financial crisis — consumers can borrow $100 for two weeks for a fee of $17.50 — the reality is very different.

The payday lending industry touts itself as a reasonably priced alternative to bank overdraft fees and late charges. And in a perfect world, they might just be right.

But the world is far from perfect, and for 90 percent of Alabama consumers of payday loans, payday lending is a wolf in sheep’s clothing.

That’s because working families who use payday lending simply do not have enough resources to dig themselves out of the hole. Alabama’s per capita income is $5,788 less than the national average. The unemployment rate stands at 10.4 percent, the highest in 25 years.

Many working families struggle from check to check and barely scrape by with enough to pay rent and utilities, put food on the table, and fill their car’s gas tank. When unexpected expenses come up — perhaps a sick child or an unexpected car repair — these Alabamians simply do not have enough income to make ends meet. They take out a payday loan to cover that unexpected cost, but when payday comes around, they don’t have enough money to pay off the loan and all their other bills.

Unlike credit cards or loans from family members, payday loans can’t be paid off in installments. It is an all-or-nothing deal. So 90 percent of payday loan borrowers end up “rolling over” their debt into a new loan — which comes with another $17.50 fee.

Those fees add up quickly. If it takes a borrower just three months to save enough to pay off that $100 loan, the payday lender more than doubles its money. And what if it takes a year? Well, the payday loan fees amount to a 456 percent interest rate.

As you can see, payday lending is a broken product that ensnares borrowers in unmanageable debt. Using payday loans doubles the risk a borrower will end up in bankruptcy within two years, doubles the risk of being seriously delinquent on credit card payments, and makes it less likely that borrowers can pay other bills and get healthcare. Payday loan use also increases the likelihood that consumers’ bank accounts will be closed involuntarily.

Something needs to be done to reform the payday lending industry and protect working Alabamians from going down a financial rabbit hole because of a short-term financial problem. Consumer experts say that capping interest at 36 percent — the same rate that banks and other lenders can charge — would be a start.  Well, lets get started.

Published on Sunday, October 18 in the Anniston Star.

Posted by Kristina Scott