Payday Loans in Alabama: Are They Legal and How Do They Work?

Payday loans enable you to get an advance on your pay, often with no credit check. While these short-term loans can be convenient when you need cash quickly, they carry certain risks for borrowers. Before you take out a payday loan in Alabama, consider whether you might be able to get the money you need through safer alternatives. 

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Are Payday Loans Legal in Alabama?

Payday loans are legal in Alabama and are regulated under Section 5-18A-1 of the statutory code. Here are the legal rules for Alabama payday loans.

• APR: The maximum APR is 638.75%. 

• Fees: The maximum finance charge is 17.5%; lenders may charge up to a $30 nonsufficient funds (NSF) fee. 

• Loan limits: The maximum loan allowed is $500.

• Loan terms: Loan terms must be no less than 10 days and no more than 31 days.

• Renewal: One renewal per loan is allowed.

• Additional loans: There's no limit on the number of loans a borrower can have. 

The maximum APR listed above assumes a $100 day loan with a 10-day term. Your actual effective APR may be different, depending on your loan amount and term. For perspective, the Federal Trade Commission (FTC) puts the typical APR at 391%. That's based on a $500 loan with a $15 fee, a finance charge and a two-week term. 

How Payday Loans Work in Alabama 

Alabama residents can apply for payday loans online or in person at a lending location. To apply for an Alabama payday loan, you'll need to have:

• Proof of identity

• Proof of income

• An active bank account

The payday lender will verify your ID and income, and ask for your bank account number and routing number. This is necessary to allow them to draft a payment for the loan on the due date, which is typically your next payday. You'll also receive loan funds via direct deposit if you apply online; you may be able to get cash instead if you apply in person. 

In Alabama, you can get a payday loan with a term of 10 to 31 days. You're allowed to renew your loan once, and you can apply for a new loan the day after you pay off an existing one. That can be dangerous, however, since it can lead you into a payday loan debt trap. 

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The Risks and Dangers of Payday Loans

Payday loans can help with short-term financial needs and they often offer the convenience of approval with no credit check. Alabama borrowers should be aware of the risks of payday lending and how it can hurt financially. 

• Rates: Payday loans can carry much higher effective rates than credit cards, personal loans and other alternatives. Getting cash quickly may be a relief in an emergency, but it can come at a high cost.

• Renewal fees: Renewing a payday loan means you delay repayment until your next payday. That might be necessary in a cash crunch but your lender can charge a rollover fee, which adds to your total cost of borrowing.

• Multiple loans: Alabama doesn't limit the number of loans you can have at one time. You can get a new payday loan the next business day after you pay off an existing one. That could lead to overreliance on payday loans and leave you struggling to pay off the debt that accumulates.

• Credit scores: Failing to repay a payday loan on time could hurt your credit. Your lender could report the default to credit bureaus and initiate collection actions against you. In a worst-case scenario, you could be sued for payday loan debt. 

Alabama payday loans can be a temporary fix for short-term needs but the risks generally outweigh the benefits for most borrowers. There are other, more cost-effective ways to get cash than payday loans. 

How To Avoid the Payday Loan Trap

If you feel pressured to get a payday loan when you need money, take a breath. Odds are you have at least one alternative you could tap into. We'll offer some possibilities a little later. 

In the meantime, think about what you can do to reduce the need for a payday loan. These tips can help you build a stronger financial foundation. 

• Track spending and make a budget: When you know where your money goes each month and where you can cut back to save, you reduce the need for payday loans. Budgeting apps can link to your bank account to record spending automatically and give you a snapshot of your financial health. 

• Start an emergency fund: A rainy day fund is money you hold in reserve until a true emergency comes along. If you start a budget, go over it to see how much money you have left over to save after expenses are paid each month. This is your seed money for your emergency fund. And if there's nothing left over or you're in the red, try the next tip.

• Cut unnecessary expenses: An unnecessary expense is anything you don't absolutely need to maintain a basic standard of living. Travel and hobbies, for example, are wants that you could do without in order to grow emergency savings. If you've already cut your budget to the bone, you may need to focus on the income side of your budget. Starting a side hustle, getting a part-time job or increasing your hours at work could help you bring in the extra money you need to save. 

If you feel overwhelmed by your financial situation, it may help to talk to a credit counselor. A credit counselor can review your income, expenses and debt to help you develop a plan to pay down what you owe, spend less each month and start saving so that you can leave payday loans behind. 

When a Payday Loan Might Be the Only Option

Payday loans can sometimes be someone's only choice to borrow. This might be true for you if you've been denied all other loans because of your credit, you don't have friends or family you could borrow from and you've tried every way you know to make extra money but come up short. 

If you're in a situation where you must take out a payday loan, take steps to protect yourself. That includes reviewing the fine print on the loan so you know what it's going to cost and when the payment is due, and not borrowing more than you need. 

Before the loan comes due, check your bank account balance and upcoming deposits to make sure you'll have enough money to cover the amount owed. If not, you may need to ask the lender to turn off the automatic draft and roll the loan over until your next payday. That isn't ideal, but it can help you avoid overdraft fees from the bank and/or nonsufficient funds fees from the lender. 

Safer Alternatives To Payday Loans

Payday loan alternatives can help you access the funds you need with fewer risks. Here are some of the options you might consider in place of a payday loan. 

Credit Cards

Credit cards can be helpful when you need to pay for things that don't require cash. You can pay the balance off over time, and you may be able to minimize interest charges with a 0% APR card. The introductory rate won't last forever, but it may give you enough time to pay off what you've charged interest-free. 

Earned Wage Access

Earned wage access programs let you get an advance on your pay through your employer instead of a payday lender. You may be able to get some or all of your earned wages early, though you may pay a fee to use this benefit. Taking this type of advance reduces your future paychecks temporarily, however, so consider how that could affect your budget. 

Personal Loans (Banks or Credit Unions)

Personal loans let you borrow a lump sum and repay it over time, with interest. You can find personal loans offered at banks, credit unions and through online lenders. Loan amounts may range from $1,000 to $100,000, depending on the lender. 

You'll need good to excellent credit to get the lowest personal loan rates. Look for lenders that offer rate quotes with no credit check so you can compare potential costs. 

Payday Alternative Loans (PALs)

Payday alternative loans (PALs) are short-term loans offered by credit unions. These loans may allow you to borrow $200 to $1,000 and repay it over a period of one to six months. While you may pay fees and interest, PALs can be a lower-cost option than traditional payday loans. 

You'll need to join a credit union to apply for a payday alternative loan. If you don't meet local credit union membership requirements, look for online credit unions that offer membership to everyone. 

Credit-Builder Loans

Credit-builder loans help you build a positive credit history through on-time payments. A typical credit-builder loan lets you borrow but doesn't release the funds to you right away. Instead, the loan proceeds go into a secure account. 

You make monthly loan payments, which are reported to the credit bureaus. Once the loan is paid in full, the funds in the secure account are released to you. Credit-builder loans may not be useful in emergency situations but they can help you build good credit so you can qualify for other loans later on.

Alabama-Specific Assistance Programs

Alabama offers a number of financial assistance programs to help individuals and families who are struggling. Some of the programs offered include temporary cash assistance, food assistance, unemployment benefits and low-cost healthcare. 

Most programs are income and asset-based, which means your income and assets will need to be below certain limits to qualify. Your local department of human resources or social services offices can share more information about who qualifies for aid, and how to apply.

Borrowing From Family and Friends

Friends and family may agree to lend you money if you're in a tight spot. This isn't risk-free, since failing to repay a loan to someone you know could harm the relationship. However, your "lender" may be willing to give you a loan with no interest, no fees and no credit check.

If you're worried about a loan causing problems, you might draw up a legal agreement with a promise to pay. Or you could give the person you borrow from something of value that you own as collateral. Either one could help them feel more reassured that they'll get their money back. 

Side Hustles

Side hustles can help you raise funds without a loan. Popular side hustles include:

• Food delivery

• Grocery shopping and delivery

• Pet-sitting or childcare

• Lawncare

• Taking surveys online

Some side hustles can offer same-day pay so you can work and walk away with money in hand. Starting one or more side hustles even if you don't need extra money right now can help you build a savings cushion for when an emergency happens. 

Conclusion

Payday loans can be appealing but consider the consequences before you borrow. And don't forget about safer alternatives that could help you get the money you need. 

For example, MoneyLion Instacash allows you to tap up to $500 of your paycheck in advance with no interest, credit checks or mandatory fees. You can get your money in 1 to 5 business days, or within minutes for a fee.

 And once your financial rough patch ends, you can work on budgeting and building savings to lessen the chances of needing a loan in the future. 

FAQs

What is the maximum loan amount I can borrow in Alabama?

The maximum payday loan in Alabama is $500. There is no limit on the number of payday loans you can have at one time. 

What fees and interest rates can payday lenders charge in Alabama?

Alabama payday lenders can charge a maximum finance charge of 17.5% for every $100 borrowed. For a 10-day, $100 loan that works out to an effective APR of 638.75%. 

How long do payday loans last?

Payday loans in Alabama have a minimum term of 10 days. The maximum loan term is 31 days. That's typical of payday loan terms in other states that allow them. 

Will a payday loan affect my credit score?

A payday loan may not affect your credit score initially if the lender doesn't require a hard credit check to apply. Your credit could be affected later if you default on the loan. Defaults and collection accounts reported to the credit bureaus can cost you credit score points. 

Can I get a payday loan with bad credit?

Yes, you can get a payday loan in Alabama with bad credit. Lenders may offer these loans with no credit check required at all. 

What should I do if I can’t repay my payday loan on time?

If you can't repay your payday loan on time, reach out to your lender. Alabama law allows borrowers to roll their loan over one time, which can give you more time to pay what's owed. If you still can't pay by the due date, you might have to try a different option. For example, you might ask someone you know to lend you the money to repay the payday loan, then pay them back when you can.

Sources

• Alabama Legislature - Code of Alabama Chapter 18A Deferred Presentment Services Act

• Federal Trade Commission - What To Know About Payday and Car Title Loans

• Congress.gov - Earned Wage Access Products

• MyCreditUnion.gov - Payday Loan Alternatives

• CFPB - Can taking out a payday loan help rebuild my credit or improve my credit score?