Subscription Preferences:
2 years ago

Here’s why politicians trying to kill Alabama’s payday loan industry are misguided (opinion)

Payday loan sign (Photo: Flickr)
Payday loan sign (Photo: Flickr)

Payday lending is often portrayed as a manipulative industry only concerned with preying on naïve consumers. Thus, it is no surprise that Alabama policymakers are calling for restrictions against the industry.

Without an understanding of economics and finance, however, well-intended regulators could harm the very payday loan customers they are hoping to help.

It is important to recognize that payday lending meets an important need in the community. According to a survey by Federal Reserve economist Gregory Elliehausen, over 85 percent of payday lending customers reported that they took out a payday loan in order to meet an unexpected expense. While we all face unexpected expenses, the typical payday lending customer finds these circumstances especially difficult since traditional lenders and even close friends and family are often reluctant–or unable–to make unsecured loans to them given their poor credit histories.

While the need for short-term lending often isn’t disputed, reports of Annual Percentage Rates (APR) of several hundred percent often invoke anger and hostility, and provide the impetus for calls to restrict this rate to under 40 percent. But this is an inappropriate portrayal. The typical payday lending loan is under $400, lasts under four weeks (even including consecutive new loans and renewals), with an interest charge under $19 per $100.

Where does the high APR come from, then? For example, let’s assume you take out a $400 loan for two weeks with a total finance charge of $76. That amounts to a nearly 495 percent APR using a common calculation. Basically, the APR is calculated by projecting the interest rate for an entire year! Looking at the APR, however, is extremely misleading because the vast majority of these loans last only two to four weeks. Limiting the APR to 40 percent would mean that a payday lender could only charge $6.14 for a two-week loan of $400.

Would you be willing to lend an unsecured $400 out of your own pocket to a financially risky person for two weeks for only $6? Certainly not! Especially if you consider that, as a payday lender, you would have to pay rent on a building, pay your electricity bill, make payroll, and incur expected losses on unpaid loans.

Even without interest rate restrictions, payday lending isn’t a very lucrative business; a Fordham Journal of Corporate & Finance Law study finds that the typical payday lender makes only a 3.57 percent profit margin. That is fairly low when you consider that the average Starbucks makes a 9 percent profit margin and the average commercial lender makes a 13 percent profit. Interestingly enough, the average bank overdraft charge of $36–an alternative option for payday lending customers–could easily result in an APR of several thousand percent.

In a review of the research on payday lending in the Journal of Economic Perspectives, economist Michael Stegman recommends that policymakers resist implementing legislation restricting the interest rate charged by payday lenders and instead examine ways to help prevent the small number of customers who are caught in a cycle of payday lending debt. This is because the vast majority of payday lending customers pay off their debts and voluntarily agree to the interest rates charged. In fact, Gregory Elliehausen finds that over 88% of payday lending customers were satisfied with their most recent loan from a payday lender. Almost no payday loan customers reported that they felt they had insufficient or unclear information when taking out their loan.

Christy Bronson, a senior economics student at Troy University, conducted a survey to see if these national results held true here in Alabama. The results from her study on payday lending customers in the Wiregrass area corroborated these national results. A full 100 percent of respondents reported being satisfied with their most recent payday loan experience and 78 percent reported being satisfied with their payday loan experiences overall. If most payday lending customers were caught in a vicious debt cycle, you would expect customer satisfaction to be much lower. Survey participants in the Wiregrass area also overwhelmingly indicated that they were satisfied with their knowledge and understanding of the terms and conditions of payday lending. The survey also found that payday lending customers in the Wiregrass area used payday loans moderately and found that the overwhelming majority of payday lending customers do not consider themselves to be in financial difficulty as a result of using payday loans.

There is a logical explanation for these findings. Payday lenders don’t profit from customers who can’t repay their loans. Cycling debt only increases the risk that the payday lender will not get their interest or principal back and will lose out to secured creditors in a bankruptcy. This is why many payday lenders in Alabama came together to form Borrow Smart Alabama, an organization designed to better inform payday lenders and to set a code of ethics and accountability for payday lenders in Alabama.

Running payday lenders out of business with severe interest rate restrictions or costly regulation won’t keep customers in urgent need of cash from borrowing money. We know from experience that banning goods or services that people want doesn’t prevent a black market from emerging. Just look at examples of alcohol, drug, and gun prohibition. Payday lending customers, lacking the credit worthiness required for traditional lines of credit, will only be forced to use less desirable–and more expensive–credit options such as loan sharks, online lending, or overdrawing their bank account or credit card.


Daniel J. Smith is the associate director of the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1. Christy Bronson is a senior economics major at Troy University.

36 mins ago

WATCH: University of Alabama Police Department completes lip sync battle featuring ‘Sweet Home Alabama’

Monday, The University of Alabama posted a video of their campus police department participating in a lip sync battle against Clemson University.

UAPD chose “Sweet Home Alabama” as their song and, afterward, challenged all other SEC schools to join in on the competition.

Watch the full video here.

Sean Ross is a staff writer for Yellowhammer News. You can follow him on Twitter @sean_yhn

1
43 mins ago

Rep. Byrne: Illegal immigrants will not be housed in Baldwin County

Tuesday, Congressman Bradley Byrne (AL-01) announced that illegal immigrants would not be housed at Navy airfields in Baldwin County.

Congressman Byrne opposed the housing of 10,000 illegal immigrants at Naval Outlying Field Silverhill and Naval Outlying Field Wolf in south Baldwin County.

Byrne, along with other members of the Alabama and Florida Congressional delegation, sent a letter to Secretary of Defense Mattis and Secretary of Homeland Security Nielson expressing their concerns with the proposal.

Byrne released both a statement and a tweet on Tuesday regarding the decision of the proposal.

161

“Housing illegal immigrants at ill-equipped airfields along the Gulf Coast was always a terrible idea, so I appreciate the confirmation that this plan is no longer being considered. We had a team effort to push back this flawed idea, and I especially want to thank Baldwin County Commissioners Chris Elliott and Tucker Dorsey and Baldwin County Sheriff Hoss Mack for their advocacy on this issue,” said Byrne in a news release.

He added, “While I am glad this issue is resolved, we must continue working to secure the border and eliminate the need for additional housing for illegal immigrants altogether. I remain 100% committed to working with President Trump to build a border wall, hire additional border patrol officers, and ensure our border security is as strong as possible.”

Click here to read the full letter ICE Deputy Director Ronald Vitiello sent to Rep. Byrne regarding the decision.

@RealKyleMorris is a Yellowhammer News contributor and also contributes weekly to The Daily Caller

1 hour ago

Liberal heckler hurls object, expletives at Doug Jones — Jones says ‘there’s just as many people passionate on the other side’

After a liberal heckler hurled an object and expletives at Sen. Doug Jones at a town hall Monday, Alabama’s junior senator compared the incident, which ended with police officers hauling the agitator out, to peaceful conservative efforts to persuade Jones to vote to confirm President Trump’s nominee Brett Kavanaugh to the Supreme Court.

AL.com’s Howard Koplowitz reported that Jones indicated at the town hall that “conservatives in the state are trying to apply the same pressure on him as the woman at the Birmingham event,” referring to the protester.

Jones said, “There’s just as many people passionate on the other side, so that doesn’t make it real easy.”

While the pressure on Jones from the left has stooped to this kind of antic, conservative efforts have all been peaceful and respectful to this point. They are backed by the fact that a majority of Alabamians polled support Judge Kavanaugh’s confirmation.

104

The Judicial Crisis Network’s massive ad buy has been flooding Alabama’s airwaves since July 9, and the NRA started their own ambitious television campaign last week.

Concerned Women for America, a Christian women’s organization, is also focusing grassroots efforts on the state.

Sen. Richard Shelby voiced his strong support for Kavanaugh’s confirmation after meeting with him recently, but Jones remains undecided.

“Senator Doug Jones’ inability to make a decision on casting an Alabama vote for Judge Kavanaugh is disconcerting,” Alabama Republican Party Chair Terry Lathan told Yellowhammer News.

Sean Ross is a staff writer for Yellowhammer News. You can follow him on Twitter @sean_yhn

1 hour ago

Arab High School to dump ‘Dixie’ tradition at football games

A rural Alabama high school is ending its tradition of playing “Dixie” at football games.

John Mullins, superintendent of city schools in Arab, said he made the decision to quit playing the song at Arab (AY-rab) High School, but not because of any “external pressure.”

174

Leaders in the educational system and the school board have talked for months about dropping the song, he said, and local news outlets reported in June that the longtime band director was retiring.

“While I fully understand the difficulty of changing a tradition, the song has negative connotations that contradict our school district’s core values of unity, integrity, and relationships,” Mullins said in a statement reported by WHNT-TV.

School bands throughout the South used to play “Dixie,” but the practice ended as the region got further away from legalized racial segregation.

The Arab High School Band has played “Dixie” after touchdowns for decades.

Students and staff at the school will vote on a new fight song after this football season.

In the meantime, the band will play an instrumental soul song that’s popular among marching bands, “The Horse.”

Census statistics show the town of about 8,200 people, located in northeastern Alabama, is more than 96 percent white.
(Associated Press, copyright 2018)

Sign-up now for our daily newsletter and never miss another article from Yellowhammer News.

Rep. Byrne: ‘Great value’ found in traveling around district, speaking with local leaders

Each August, the House of Representatives typically enters a period of recess known as the August District Work Period. This is time set aside for Members of Congress to travel across their home districts visiting with the people they represent.

For me, this is incredibly valuable time that I can spend listening to my constituents and gaining a better understanding of the issues impacting our area. Here is just a quick highlight of my August District Work Period so far.

511

As you probably already know, I love to hold town hall meetings throughout the First District to hear directly from the people I represent. This August, I am holding a “Better Off Now” Town Hall Tour with twelve stops in all six counties that make up the First District. So far, we have held town hall meetings in Salipta, Atmore, Brewton, Dauphin Island, Millry, Citronelle and Mobile. Later this month, we will make stops in Grand Bay, Monroeville, Seminole, Loxley and Spanish Fort. You can get all the details about the town halls online at Byrne.House.Gov/BetterOffTour.

Visiting local businesses and talking with employees is another priority for me in August. For example, I have already visited Olin in McIntosh, the Louisiana Pacific facility in Clarke County, Serda Brewing in Mobile, and Metal Shark Boats and Master Marine in Bayou La Batre, just to name a few. The visits help me learn firsthand how federal issues are directly impacting employers and employees in Southwest Alabama.

A really special opportunity was being able to ride along with UPS to help deliver packages on the Eastern Shore. I dressed up in the full UPS uniform, rode in the truck, and personally delivered packages. It really helped to step in the driver’s shoes and see the difficult work they do every day. I am especially grateful to Chris Dorgan for showing me the ropes.

Just last week, I hosted Chris Oliver, NOAA Assistant Administrator for Fisheries, down on Dauphin Island for a Red Snapper research trip. As one of the leading federal officials responsible for our fisheries, I welcomed the opportunity to show off the health of the Red Snapper stock in the Gulf, as well as the very impressive research being done locally by the University of South Alabama and the Dauphin Island Sea Lab.

Also last week, I traveled to the Gulf Coast Veterans Health Care System in Biloxi to meet with the director and get an update on services for our veterans. As you may know, the Biloxi VA oversees most of our local VA facilities. It was a productive visit as I work to hold the VA accountable and ensure our veterans receive the care they deserve.

We had the annual Women’s Forum in downtown Mobile, which is organized by the Community Foundation of South Alabama. We had another outstanding crowd as local women had the opportunity to network and hear from speakers and panelists about issues important to them.

I find great value in holding roundtable discussions to hear directly from leaders about specific issues. With this in mind, we held separate roundtables with local school superintendents, economic developers from our area, and community leaders from Chatom. Each of these roundtables were very informative, and we have more scheduled later this month.

As you can probably tell, this August District Work Period has already been a huge success. The good news is that we are just getting started. I look forward to spending more time around Southwest Alabama throughout August to help me be the best Congressman possible.

U.S. Rep. Bradley Byrne is a Republican from Fairhope.