That’s the essence of the argument in favor of capping interest rates on payday lenders everywhere their businesses have sprung up. It’s an argument that could be taken up in the halls of the Alabama Legislature during the session that begins today, and the group Alabama Arise is working hard to make sure it’s an idea that doesn’t die an ignominious death in some faceless committee in Montgomery. That happened last year with a proposal to cap interest rates on the loans at 36 percent annually.
If the number of payday loan businesses is any indication, there is strong demand for their services. With more than 1,000 of them operating in Alabama — compared to 210 McDonalds restaurant locations — the need is obvious.
The question of whether the state should be regulating their businesses to protect the people of Alabama is one that will be facing the business-friendly Republican majority; and if regulations such as interest caps are put in place, what is the correct amount?
Payday lenders have been successful by conveniently making small loans. Their clients are, typically, low-income earners who have difficulty managing their budgets or are facing an expense that was not planned for.
The basics of the business are simple enough. If someone has an urgent need for cash and they have a job and a bank account, they can write a check or authorize a debit card transfer at a specified future date and get the money they need, up to $500. The check or transfer includes the amount borrowed plus a service charge for the loan.
Borrowers can get in trouble with escalating interest charges if they can’t pay back the loan on time, and can sink deeper into debt. Annual interest rates can soar into triple digits, leaving borrowers owing more interest than the amount of the original loan.
We think it’s reasonable for our state to step in and place limits on interest rates in the interest of protecting borrowers from stepping into financial quicksand.
At least a dozen other states have attempted to ban these types of loans, and others have put interest caps in place. Some lenders have found loopholes to keep operating in some states, and in others attempts have been made to get new legislation passed to allow high interest rates once again.
Consumers cannot be expected to become experts on every product or service offered in the marketplace; government should play a reasonable role in consumer protection. That applies to requiring toys to be made in ways that aren’t dangerous to children, inspecting meat processing facilities to ensure the safety of our food, and regulating banking and lending businesses to protect borrowers.
With most of our legislators facing re-election this year, they want to complete this session as quickly and as quietly as possible. We can appreciate that. Still, they have taken on important positions of public service, and this is a topic that needs their attention.