Due to overzealous advocate groups, the term payday loan can conjure up images of greedy loan sharks or poor people with nothing left to lose. However, this image is not accurate. A payday loan is simply a small short term loan. The practice of payday lending does need to be regulated to prevent exploitation, but that need is no different than any other loan agreement regulation on record. In Alabama there are specific laws and legal restrictions in place to protect the borrower and lender during this practice. In order to understand those laws it will first be necessary to understand the lending process.

What is a Payday Loan, Exactly?

A payday loan, sometimes known as a cash advance, is a small short-term loan. The amount of money that can be borrowed is small; often less than $1000 but the exact amount varies by state. Typical loans of this type will need to be repaid within two weeks to one month. This time period is how the loan has come to be known as a payday loan, the repayment period coincides with the borrower's next pay period.

There are further aspects of these loans that should be addressed. The most notable items to address are rollover and interest. Rollover is a term that references the ability of a loan to roll over to the next pay period. This means that the debt repayment period can be extended to the next equal point in time. For example, a two week loan repayment agreement can be extended out for another two week period. Interest rates vary by state, but they are typically higher for this sort of loan than for loans of other types.

What are the Payday Lending Rules in Alabama?

Payday loans in Alabama are regulated by various methods. There are limitations on the amount of money that may be borrowed for any given loan. There are limits on the number of rollovers allowed. The interest rate is fixed at a maximum allowed value. There is also a 'cooling off' period in effect. There are restrictions on collection activities performed by loan lenders.

Maximum Borrowing Amount - In Alabama the maximum amount of money that may be borrowed on a single payday loan agreement is $500. Borrowers are not legally allowed to take out more than one loan at a time.

Maximum Number of Rollovers - Borrowers in Alabama are allowed one rollover period if they cannot pay off their debt in full at the appointed time. All fees that are applicable may be applied, including interest.

Maximum Interest Rate - The maximum interest rate allowed for a payday loan in Alabama is 17.5%. There is an allowance for 3% interest per month if the borrower defaults on the loan after the single rollover period.

Cooling Off Period - Once a borrower has repaid two payday loans in succession they must wait until the next business day to take out a new payday loan agreement.

Collection Activities Limitations - The lender cannot undertake criminal, such as having a borrower arrested for non-payment, legal action against a borrower unless some form of deliberate fraud has occurred. Specifically, the borrower will need to have authorized payment with a check or electronic withdrawal through a bank account that is closed. 

Any lender who threatens to have a borrower imprisoned has no power to do so unless fraud is proven to have deliberately occurred. Lack of timely payments is not proof of fraud. Further, the lender may collect a maximum of $30 as a collection fee, and attorney fees may not exceed more than 15% of the original amount lent.

Payday loans are a quick and simple method of acquiring money when you need it. They can be useful lending options during an emergency. Knowing the laws and regulations regarding legal loan lending practices in this industry will help you to utilize this method when it is needed.