My name is Rob Collins; I am a policy analyst with the Arise Citizens' Policy Project. The purpose of ACPP is to recommend fairer state policies, especially for Alabama's low-income citizens.

Predatory lending - the practice of lending small amounts of money at exorbitant rates for short periods of time - is still with us. Formerly associated with smoke-filled back rooms and organized crime, predatory lending has changed its image and its name. It's now called "payday lending," and it operates out of strip malls or under illuminated signs. Often the lender is now part of a statewide or national chain.

The members of Alabama Arise voted last fall to have their staff monitor predatory lending practices, such as payday lending, in Alabama. Their concern arose from direct experience of the human suffering that results from these practices. When a high-interest loan leads to a widening spiral of debt, some people turn to their churches as a last resort.

Here's how payday lending works. A customer writes a personal check for the needed cash, plus a fee for the lender. The borrower and lender both know the borrower does not have sufficient funds to cover the check. The lender agrees to advance the cash but hold the check until a specified date - usually either two weeks or the next payday. On that date, the customer can either redeem the check with cash, or allow the check to be deposited.

What's wrong with this practice? Well, the typical lender's fee on a two-week payday loan is $15 to $20 on every $100 borrowed. For a two-week payday loan of $100, a $15 fee, or finance charge, works out to an annual percentage rate (APR) of 390 percent. If the borrower can't repay the loan after two weeks, the loan has to be "rolled over" - with an additional fee of $15 or $20 per $100 borrowed.

The payday lenders like to present an air of innocence. They claim that they are saving their customers the expense of bounced-check fees at the bank. They portray their industry as a provider of financial aid for emergency expenses, such as a high utility bill or a prescription.

However, beneath the facade of legitimacy lies a debt trap. The Consumer Federation of America (CFA) has compared the cost of borrowing from a payday lender, a small loan company, and a credit card cash advance. For a one-month loan of $200, the CFA found the following costs to the borrower:

Not only does the payday loan cost more; the cost continues to climb more rapidly than the other types of loans:

• If the borrower needs $200 for one month, the payday loan has to be rolled over every two weeks, with new fees charged. The cost climbs to $140 for a $200 loan.
• If the borrower can't pay the $140, the loan rolls over a fifth time. The total finance charge is now $210, more than the amount borrowed. Meanwhile the other types of loans, held for three months, would still only cost about $12 each.

The consequences for the borrower are often severe:

• High-cost debt can hasten, rather than relieve, family financial ruin.
• Payday loans shift family income from basic necessities to loan fees.
• With their high fees and non-declining balance, payday loans can turn financial strain into financial chaos.
• Payday loans do not provide one-time help. The average "payday borrower" takes out 11 loans a year, according to an industry study.

Arise recommends a favorable report for S.B. 290.

Payday loans are small loans, and payday lenders should have to play by the same rules that small loan companies must follow.

Alabama consumers who are forced to turn to payday lenders deserve the same legal protections that other borrowers have. Our citizens deserve legal protections that safeguard their pocketbooks and their dignity from payday loan sharks.

Rob Collins
Policy Analyst
Arise Citizens' Policy Project
P.O. Box 612
Montgomery, AL 36101
334-832-9060

For more information

• Payday Lender Survey - U.S. PIRG, February 2000
• Safe Harbor for Usury - CFA, September 1999
• The Growth of Legal Loan-Sharking - CFA, November 1998
• Interest rates charged by payday check stores as high as 1826% on a $100 loan - Bankrate.com, Feb. 19, 1998