“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 other hand, Cesar said the decline in the use of payday loans is not necessarily indicative 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 at the Center for Responsible Lending, said that despite the impact of pandemic relief on Californians, some of these programs already have an end date. The moratorium on evictions in California, for example, is expected to end on September 30. The deployment of rental assistance has been slow. Tenants with unpaid rent risk 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 2012 study by Pew Charitable Trusts found that 69% of clients use the funds for payday loans. 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 through national mayors for a guaranteed income effort. California 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 long attempted to regulate predatory lending 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 is fees, especially from people who rely on payday loans as a series.
A total of $ 164.7 million in transaction fees – 66% of the industry’s commission income – came from clients who took out seven or more loans in 2020. About 55% of clients opened a new loan on the same day. the end of their previous loan.
After multiple unsuccessful efforts over the past few years to regulate the industry, California lawmakers are not pursuing major reforms this session to combat the industry. Torres called for continued legislative efforts that would cap interest rates to ease what she calls the debt trap.
“It’s crazy to think that a decision maker would see this and say, ‘It’s OK. It’s good for my constituents to live in these circumstances, ”said Torres. “When it is actually in the power of California decision makers to change that.
Alternatives to payday loans
There is evidence that the decrease in payroll activity correlates with COVID-19 relief efforts. While there are a number of factors in the decline, they likely include the distribution of stimulus checks, loan abstentions, and the growth of alternative funding options. More commonly referred to as “early access to pay,” the new industry claims it is a safer alternative.
Businesses lend a portion of a client’s salary through phone apps and don’t charge interest charges. The product is not yet regulated, but the state’s financial watchdog has announced that it will begin investigating five companies that currently provide the service.
The problem with this model, according to Torres, is that there is no direct pricing structure. To make a profit, apps require customers to tip for the service.
“Unfortunately, that tip often obscures the ultimate cost of the loan,” Torres said, adding that some companies go so far as to use psychological tactics to encourage customers to leave a big tip.
“Customers have expressed their relief that our industry is always there for them under the most difficult circumstances and we are proud to be there during this time of need,” said Leonard.
Despite the decline in business last year, 1.1 million customers borrowed a total of $ 1.7 billion in payday loans last year, with 75% of them coming back for at least one loan additional in the same year.
Torres said the Center for Responsible Lending continues to work with lawmakers to draft bills that would cap interest rates to make payday loans more affordable. Requiring lenders to assess the client’s ability to repay the loan would also prevent clients from falling into the debt trap, she said.
“They act like they’re offering this lifeline to someone,” Torres said. “It’s not a lifeline. They tie up (the clients) with an anchor.