Consumers flock to alternative financial providers, in Alabama and nationwide, because the services they offer are easily accessible to people who have no mainstream banking relationship. However, warns University of Alabama economics professor Gary Hoover, payday and title lenders, check-cashers, and similar establishments "hurt people more ... the rates charged are extremely out of line with traditional bank rates."
A study released this year by the California-based Insight for Community Economic Development concludes that while such businesses do stimulate some economic activity, any gains are offset because the exorbitant interest rates lower household spending. The group's research indicates that payday lending cost the U.S. economy $744 million -- $47.7 million of it in Alabama -- in 2011. Local economies suffer in part, according to Hoover and others, because payday loan customers tend to borrow repeatedly. While the first advance may be to handle an emergency, the steep fees keep borrowers from catching up and instead drive them deeper into debt. It often gets to the point where they need the loans just to pay for basic expenses like utilities, says Stephen Stetson of Alabama Arise. Moreover, the policy analyst adds, by clustering the businesses in target communities, payday and title lenders "take advantage of people who can walk from store to store. People are doing that 10 or 11 times, borrowing way more than the $500 limit."