Government pandemic aid may have helped some Californians avoid resorting to expensive payday loans last year, but some experts say it may be too early to celebrate.
A new report has found that in 2020, California saw a 40% drop in underwritten payday loans from 2019, a drop equivalent to $ 1.1 billion. Almost half a million fewer people have not used payday loans, down 30% from 2019.
Despite the unprecedented job loss triggered by the pandemic last year, the government-funded financial aid has been enough to have a huge impact on the payday lending industry, according to the California Department of Financial Protection and of innovation. The new State Department released the report last week as part of its continued efforts to regulate and supervise consumer financial products.
the report comes on the heels of California’s new $ 262.6 billion budget, with multiple programs aimed at reducing economic inequalities within the state. An unprecedented $ 11.9 billion will be spent for Golden State Stimulus Payments, a unique advantage that is unlikely to continue in the years to come.
“With the disappearance of these benefits, we expect that there will potentially be an increase (in payday loans),” said department spokeswoman Maria Luisa Cesar.
Only temporary relief
Industry Representatives, State Regulators, and Consumer Advocates Agree: Government Aid Has Helped Californians Avoid Dependence On Payday Loans, High-Interest Short-Term Loans That Need To Be Paid in full when borrowers receive their next paycheck. Additional reports have revealed that the California trend reflects trends in other states.
Thomas Léonard, executive director of the California Association of Financial Services Providers, said 2020 was a difficult year for the industry as the pandemic changed the way consumers managed their finances. His association represents providers of small dollar consumer loans, payday loans, check cashing and other financial services to consumers.
“The demand for small loans fell in 2020 as many consumers stayed at home, paid off debts, managed fewer expenses and received direct payments from the government,” Leonard said in a statement.
On the flip side, Cesar said the decline in the use of payday loans is not necessarily a sign of a better financial situation for Californians.
“It’s just too simplistic of a picture,” she said. “The cash aid efforts may have helped consumers make ends meet, but people have not come out of the woods.”
Marisabel Torres, California Policy Director for the Center for Responsible Lending, said that despite the impact of pandemic relief on Californians, some of these programs already have an end date. California moratorium on evictions, for example, is scheduled to end on September 30. The deployment of rental aid has been slow. Tenants with unpaid rent face potential eviction for those who cannot afford rent.
Once those programs are gone, Torres said, people will continue to need financial help.
“There’s still this large population that will continue to turn to these products,” Torres said.
With the exception of last year, the report showed that payday loan usage has remained stable over the past 10 years. But the use of payday loans doubled in the years following the Great Recession.
The state report does not provide any context on how consumers used payday loan money in 2020, but a to study by the Pew Charitable Trust in 2012 found that 69% of clients use the funds for recurring expenses, including rent, groceries and bills.
Almost half of all payday loan clients in 2020 had an average annual income of less than $ 30,000 per year, and 30% of clients were making $ 20,000 or less per year. Annual reports also consistently show higher usage among clients earning more than $ 90,000 per year, although the financial monitoring department has not been able to explain why.
“Basic necessities, like groceries, rent… To live you have to pay for these things,” Torres said. “Anything that eases this economic pressure is good for people. ”
Lawmakers across California began to establish pilot programs that would ease some of this economic pressure. Stockton was the first town to experience a guaranteed income for its residents. Compton, Long Beach and Oakland have followed suit across the national Mayors of Guaranteed Income effort. California has approved its first guaranteed income program earlier this month.
Little regulation, high fees
Payday loans are considered to be some of the most expensive and financially dangerous loans that consumers can use. Experts say last year’s drop in usage is good for Californians, but the industry still lacks the regulations needed to reduce loan risk for low-income consumers.
California lawmakers have a long story to try to regulate predatory loan in the state, but have failed to implement meaningful consumer protection against payday loans. The most notable legislation came in 2017, when California began requiring licenses from lenders. The law also capped payday loans at $ 300, but did not cap annualized interest rates, which were on average 361% in 2020.
In addition to sky-high interest rates, one of the industry’s main sources of income are fees, especially those of people who are serial reliant on payday loans.
A total of $ 164.7 million in transaction fees – 66% of industry commission revenue – came from clients who took out seven or more loans in 2020. About 55% of clients opened a new loan on the same day. of the end of their previous loan.
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