Government pandemic aid may have helped some Californians avoid expensive payday loans over the past year, but some experts say it may be too early to celebrate.
A new report found that California saw its payday loans decrease 40% in 2020 compared to 2019, a decrease of $ 1.1 billion. Almost half a million fewer people did not depend on payday loans, a 30% decrease compared to 2019.
Despite the unprecedented job losses sparked by the pandemic last year, the state-funded financial aid was enough to acutely affect the payday lending industry, according to the California Department of Finance and Innovation. The new State Department released the report last week as part of its ongoing efforts to regulate and oversee consumer financial products.
the report comes on the heels of California’s new budget of $ 262.6 billion, with several programs to reduce economic inequality within the state. An unprecedented one $ 11.9 billion is issued for Golden State Stimulus Payments, a one-time achievement that is not to be continued in the coming years.
“If these benefits cease to exist, we may expect an increase (in payday loans),” said department spokeswoman Maria Luisa Cesar.
Temporary relief only
Industry officials, state regulators, and consumer advocates agree: Government support has helped Californians avoid their reliance on payday loans – short-term, high-interest loans that must be paid back in full when borrowers get their next paycheck. Other reports found that California’s trend reflects trends in other countries.
Thomas Leonard, Managing Director of Association of California 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 small dollar consumer loan, payday loan, check cashing, and other consumer financial services providers.
“The demand for small dollar loans fell sharply 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 payday loan use doesn’t necessarily suggest that Californians are better off financially.
“That’s just too simple a picture,” she said. “Cash relief could help consumers make ends meet, but people are not out of the woods.”
Marisabel Torres, California Policy Director for the Responsible Lending Center, said that despite the impact of pandemic aid on Californians, some of these programs already have an end date. California Eviction moratorium, for example, should end on September 30th. The introduction of rental support has been slow. Tenants with unpaid rent stand in front possible eviction for those who cannot afford the rent.
Once those programs are gone, people will continue to need financial aid, Torres said.
“There is still this large population that will continue to turn to these products,” said Torres.
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 health report does not provide context on how consumers used payday loan money in 2020, but a to learn by the Pew Charitable Trust in 2012 found that 69% of customers use the funds for recurring expenses such as rent, groceries, and bills.
Nearly half of all payday loan customers in 2020 had an average annual income of less than $ 30,000 per year, and 30% of customers earned $ 20,000 or less per year. The annual reports also consistently show higher consumption among customers making more than $ 90,000 a year, even though the financial regulatory department was unable to explain why.
“Basic needs like groceries, rent … to live life you have to pay for these things,” said Torres. “Anything that alleviates these economic pressures is helpful to the people.”
Lawmakers across California have started pilot programs that would ease some of this economic pressure. Stockton was the first city experiment with guaranteed income for its residents. Compton, Long Beach and Oakland followed suit through the national Mayor of Guaranteed Income Effort. California approves 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 avail. Experts say the decline in usage last year has been good for Californians, but the industry still lacks the regulation necessary to lower the risk of credit for low-income consumers.
The California legislature has one extensive history to try to regulate Predatory Loans in the state, however, have failed to enact significant consumer protection on payday loans. The most notable piece of legislation was passed in 2002 when California began to require licenses from lenders. It also limited payday loans to $ 300.
In addition to exorbitant interest rates, fees are one of the most important sources of income in the industry, especially from people who regularly depend on payday loans.
A total of $ 164.7 million in transaction fees – 66% of the industry’s fee income – came from customers who took out seven or more loans in 2020. About 55% of customers opened a new loan on the same day that their previous loan ended.
To several failed attempts in recent years To regulate the industry, California lawmakers are not pursuing major reforms to combat the industry at this session. Torres called for further legislative efforts that would cap interest rates to mitigate what she calls the debt trap.
âIt’s wild to think that a politician would see this and say, ‘That’s fine. It’s okay for my constituents to live in these circumstances, âsaid Torres. “If it really is in the power of California’s decision-makers to change that.”
Alternatives to Payday Loans
There is evidence that the decline in payday activity correlates with relief efforts for COVID-19. While there are a number of factors behind the decline, they likely include the spread of stimulus checks, loan deferrals, and the growth of alternative financing options. Most commonly known as “early wage entry,” the emerging industry claims this is a safer alternative.
The companies lend part of a customer’s paycheck through phone applications and do not charge interest fees. The product is not yet regulated, but the state financial regulator has announced that it will Start surveying five companies currently offering the service.
The problem with this model, according to Torres, is that there is no direct fee structure. In order to make a profit, the apps require customers to leave a tip for the service.
“Unfortunately, that tip often tarnishes how much the loan will ultimately cost,” said Torres, adding that some companies even use psychological tactics to encourage customers to tip large.
âCustomers were relieved to know that our industry was there for them even in the most difficult circumstances, and we were proud to be there for them during this time of need,â said Leonard.
Despite the decline in activity last year, 1.1 million customers took out payday loans totaling $ 1.7 billion last year, 75 of whom returned for at least one additional loan in the same year.
Torres said the Center for Responsible Lending continues to work with lawmakers to write bills that cap interest rates to make payday loans more affordable. Requiring lenders to assess customer solvency would also prevent customers from falling into debt, she said.
“They’re pretending to provide someone with this lifesaver,” said Torres. âThis is not a lifesaver. You bind (customers) with an anchor. “
This article is part of the California division, a newsroom collaboration that studies income inequality and economic survival in California.