AFRICANGLOBE – Alabama has more payday lenders per capita than all but four other states in the country, according to a new study from Auburn University.
Some view these services as predatory to low-income or heavily African-American neighborhoods, and some cities in Alabama are regulating them.
The study provides some fuel for that argument: it found a significantly positive relationship between the number of payday lending stores to the number of banks and bank branches and the percentage of the population that is African-American.
“Walmart doesn’t say, ‘Let’s go to the rural area where there’s a population of 90.’ You locate near your customers. When a payday lender goes to a place where there’s a large population of African-Americans, does it suggest something about the type of customers they’re seeking?” said James Barth, one of the study’s three co-authors and an Auburn professor.
Payday lenders offer small uncollateralized short-term loans, typically using flat fees rather than annualized interest. In Alabama, lenders are allowed to charge up to $17.50 per $100 borrowed – that translates to an annualized interest of 456 percent.
Industry advocates say the lenders provide a service that traditional banks can’t – the fee on a short-term loan is often less than facing a bounced check fee on an unexpected medical bill or car repair. Indeed, some studies report that payday lending results in fewer bounced checks and bankruptcy filings.
Populations that tend to take out payday loans usually are higher risk clients. So the question becomes: are the interest rates charged relative to the risk?
That’s a question that we can’t answer, Barth said. But it’s a question we could answer with banks. Payday lenders aren’t required to disclose their default rates or their profitability.
“What we do find raises serious questions,” Barth said. “Why do some states prohibit them if they’re doing such a good job? I’m not saying they should be prohibited, but it would be nice to have a little more information about them … it’s hard to get information about the profitability.”
But some say customers become quickly dependent on the loans to make recurring expenses like rent, and low income people are the least likely to be able to afford the high fees.
The study also found that payday lenders are most highly concentrated in the south. The only states with more payday lenders per capita than Alabama are Oklahoma, South Carolina, Louisiana and Mississippi.
“The southeast has a high percentage of African-Americans compared to many other states, and we find that indeed payday lenders tend to locate where there’s a high percentage of African-Americans,” Barth said.
And the Southeast, Barth said, has a history of discriminating against African-Americans. If the results found high payday lender concentrations in other parts of the country, it wouldn’t be as concerning, he said.
For more than 10 years, several Birmingham area cities have enacted moratoriums against the businesses, including Fairfield, Clay, Irondale, Trussville and Center Point.
Payday lenders are illegal in 13 states, including three in the Southeast: North Carolina, Arkansas and Georgia.
But studies show that demand for short-term loans doesn’t go away after they are outlawed, said John Jahera, an Auburn professor and another co-author of the study. In Georgia, for example, there are no payday lenders, but “industrial loan services” offer a similar short term loan.
The real policy question is whether bank regulations could be reformed such that offering short term loans would be more attractive, Jahera said.
The rates would still likely be higher than the average loan, Jahera said, because short term loans tend to be high risk. But more competition typically brings prices down.
“But the question is how far down, and until we have that higher level of competition we don’t know,” Jahera said. “Traditional banks are probably one of the most heavily regulated industries in the United States. The incentive is for them to make loans that are not high risk, and that leaves the field open for others to come in.”
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