In early 2017, a group of 45 members from Alabama’s House of Representatives drafted a bill that would cap payday loan interest rates at 36 percent. This was due to the rising cases of payday loan defaulters as a result of triple-digit interest rates and high rollover fees. The house representatives felt an urgent need to prevent borrowers from losing their assets and bank accounts due to borrowing numerous payday loans.
Led by State Representative Danny Garrett, the group pushed their proposal in Senate in June 2017. Despite attracting support from both House and Senate leadership, Danny’s payday lending proposed reforms flopped due to some allies switching sides. The rebel allies wanted Danny to include additional demands, which he deemed unrealistic.
In March 2018, Senator Arthur Orr introduced new payday lending reforms that would lower payday loan interest rates through increasing repayment periods. His opponents argued that slashing payday loan interests would deliver a devastating blow to the industry and lead to unemployment.
After an intense one-hour-long debate, the house voted in favor of Senator Arthur’s reforms. His supporters believe that this victory will eventually give way to placing caps on maximum payday loan interest rates.
How do the new payday lending reforms protect borrowers?
Prior to Senator Arthur’s 2018 reforms, payday loan debtors paid interest rates as high as 450 percent. Since a majority of payday loan borrowers just has one source of income, most borrowers end up falling behind on payments. It’s impossible to keep up with costly loan installments while the costs of living keep rising.
Thanks to Senator Arthur, borrowers can get payday loans at 220 percent. The 50 percent reduction in annual percentage rates will boost the borrower’s ability to repay payday loans on time.
In addition to gaining from high-interest rates on loans, payday loan creditors make money by imposing costly rollover charges. Payday loan lenders levy different rollover charges and can adjust them at will. Senator Arthur noted with deep concern how some payday loan lenders levied roll over charges up to six times.
Senator Arthur’s reforms limit payday loan creditors from imposing rollover charges more than once. In the past, borrowers helplessly watched a debt worth a few hundreds of dollars quickly escalate into thousands due to astronomical rollover charges.
Payday loan defaulters blame the short repayment intervals for falling into unmanageable payday loan debt. In the past, payday loan lenders operating in Alabama placed 10-14 day repayment intervals. After approval of the new reforms, payday lenders are required to provide 30-day repayment plans.
Applying for numerous payday loans is quite risky due to the high-interest payments attached to each loan. In order to curb overdependence on payday loans, Senator Arthur's proposal prohibits payday loan creditors from lending money to borrowers with outstanding payday loans amounting to $500 dollars.
The newly approved Alabama payday lending reforms will prevent payday loan creditors from oppressing desperate borrowers through high-interest rates. The extended repayment duration will enable most borrowers to pay loan installments on time since the duration has doubled.
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