As California borrowers move away from small payday loans, new data from a state agency shows they’ve moved on to bigger, more expensive credit with triple-digit interest.
Larger loans rose 9 percent last year to a total of 1.6 million loans, with one-third falling between $ 2,500 and $ 4,999, according to an August report from the State Department of the United States. monitoring of companies.
The state does not regulate interest rates on these loans, and 55% of borrowings in this range had triple-digit rates in 2018.
“There continues to be a lot of predatory lending and the targeting of consumers for loans are those who can least afford it,” said Marisabel Torres, California policy director for the advocacy group Center for Responsible Lending. “These loans carry an average (rate) of 100% or more, which makes them incredibly expensive products. And the people who buy these products don’t make a lot of money.
The new data comes as state lawmakers consider a bill to cap consumer loan rates up to $ 9,999. House Bill 539 would reduce triple-digit interest to a more manageable rate of 36% plus the federal funds rate.
The bill does not regulate ancillary costs such as credit insurance, which the Pew Charitable Trust says can unnecessarily increase borrowing costs. by more than a third.
But consumer advocates, including the Center for Responsible Lending, said the legislation would help curb predatory practices on larger loans that are not subject to payday loan regulation.
Lenders opposed to the bill, which is voted on on Senate appropriations later this week, are arguing for higher rates as a way to cover defaulted consumers. They also say these borrowers have few financial options and additional regulations will hurt the limited business available to them.
The bill’s author, MP Monique Limón, D-Santa Barbara, said unsuccessful attempts in past years to cut rates even lower led to a compromise ceiling of 36%. At this rate, she said, lenders can make money with high-risk loans, while borrowers are more likely to afford the payments.
“California’s unregulated interest rate environment has led to an explosion of high-cost loans over the past decade,” Limón said at a hearing in July. “All too often, consumers are unable to afford these expensive loans. More than one in three times these loans leave people worse off than they were at the start.
Business Surveillance Department commissioner Manuel P. Alvarez said the numbers reflect the need for additional industry surveillance.
“On the one hand, it’s encouraging to see lenders adapting to the needs and expectations of their clients,” said Alvarez. “But at the same time, it underscores the need to focus on the availability and regulation of low dollar credit products between $ 300 and $ 2,500, and in particular credit products over $ 2,500 where there is no There is virtually no current rate cap under California financing law. “
The number of new payday loans fell in California last year by nearly 500,000, for a total of 10.2 million. Data shows that low-income and loyal customers make up a large portion of consumers.
More than 400,000 people who borrowed in 2018 had taken out at least 10 payday loans. Half of all borrowers earned $ 30,000 or less, while another third capped their income at $ 20,000.
A 2016 department report found that over 60% of convenience stores congregated in very poor neighborhoods and were more likely to be in black and Latino communities.
These borrowers are more vulnerable to late fees and the borrowing cycle prevalent in the convenience industry, Torres said. For example, lenders collected $ 420.5 million in payday fees last year, 71% of which came from customers who took out seven or more loans in 2018.
“It’s just crazy,” Torres said. “It’s not a successful business model. You are not helping someone who has come for a loan. You put them in a year of debt.