02/2013

Easy Money, Impossible Debt: How Predatory Lending Traps Alabama’s Poor

Alabama has four times as many payday lenders as McDonald’s restaurants. And it has more title loan lenders, per capita, than any other state.1

This should come as no surprise. With the nation’s third highest poverty rate and a shamefully lax regulatory environment, Alabama is a paradise for predatory lenders. By advertising “easy money” and no credit checks, they prey on low-income individuals and families during their time of greatest financial need – intentionally trapping them in a cycle of high-interest, unaffordable debt and draining resources from impoverished communities.

Although these small-dollar loans are explained to lawmakers as short-term, emergency credit extended to borrowers until their next payday, this is only part of the story.

The fact is, the profit model of this industry is based on lending to down-on-their-luck consumers who are unable to pay off loans within a two-week (for payday loans) or one-month (for title loans) period before the lender offers to “roll over” the principal into a new loan. As far as these lenders are concerned, the ideal customer is one who cannot afford to pay down the principal but rather makes interest payments month after month – often paying far more in interest than the original loan amount. Borrowers frequently end up taking out multiple loans – with annual interest rates of 456% for payday loans and 300% for title loans – as they fall deeper and deeper into a morass of debt that leaves them unable to meet their other financial obligations. One study found, in fact, that more than three-quarters of all payday loans are given to borrowers who are renewing a loan or who have had another loan within their previous pay period.2

As the owner of one payday loan store told the Southern Poverty Law Center, “To be honest, it’s an entrapment – it’s to trap you.”

Remorseful borrowers know this all too well.

This report contains stories of individuals and families across Alabama who have fallen into this trap. The Southern Poverty Law Center reached out to these borrowers through listening sessions and educational presentations in various communities across the state. We also heard from lenders and former employees of these companies who shared information about their profit model and business practices. These stories illustrate how this loosely regulated industry exploits the most vulnerable of Alabama’s citizens, turning their financial difficulties into a nightmare from which escape can be extraordinarily difficult.

As these stories show, many individuals take out their first payday or title loan to meet unexpected expenses or, often, simply to buy food or pay rent or electricity bills. Faced with a money shortage, they go to these lenders because they are quick, convenient and located in their neighborhoods. Often, they are simply desperate for cash and don’t know what other options are available. Once inside the store, many are offered larger loans than they requested or can afford, and are coaxed into signing contracts by salespeople who assure them that the lender will “work with” them on repayment if money is tight. Borrowers naturally trust these lenders to determine the size loan they can afford, given their expenses, and for which they can qualify. But these lenders rarely, if ever, consider a borrower’s financial situation. And borrowers do not understand that lenders do not want them to repay the principal. Many times, they are misled about – or do not fully understand – the terms of the loans, including the fact that their payments may not be reducing the loan principal at all. The result is that these loans become financial albatrosses around the necks of the poor.3

It doesn’t have to be – and shouldn’t be – this way. Commonsense consumer safeguards can prevent this injustice and ensure that credit remains available to low-income borrowers in need – at terms that are fair to all.

The Alabama Legislature and the Consumer Financial Protection Bureau must enact strong protections to stop predatory lenders from pushing vulnerable individuals and families further into poverty. Our recommendations for doing so are contained at the end of this report.