Lenders change focus as payday loans hit 13-year low in California

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Dive brief:

  • Payday Loans Dip To Low In 13 Years In California, Says State Department of Business Oversight (DBO) said in a press release Thusday. The number of payday loans taken by consumers in 2018 (10.2 million) and the total amount of these loans ($ 2.8 billion) are the lowest figures since 2006, a continuation of a five-year drop, according to American Banker.
  • However, it appears that lenders are migrating towards offering higher loans which are subject to less stringent regulations. Payday loans, as defined by California, are limited to $ 300. Although the accompanying fees are capped at 15%, payday lenders charge an average annual interest rate of 376%. “On the one hand, it is encouraging to see lenders adapting to the needs and expectations of their clients,” DBO Commissioner Manuel P. Alvarez said in the press release. “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 the [California Financing Law]. “
  • The report also highlights the industry’s reliance on loyal customers of low-income consumers. Loyal customers represent 80.7% of the total amount borrowed. More than three-quarters of subsequent loans to loyal customers were issued within a week of the previous loan’s maturity. Half of all payday loan clients had an average annual income of $ 30,000 or less. And loyal customers who took out seven or more loans paid 70.7% of the $ 420.5 million in fees collected by the industry, according to the press release.

Dive overview:

California State Assembly passed a bill in May, that would cap interest rates at 36% plus the federal funds rate on installment loans between $ 2,500 and $ 9,999, according to American Banker. About 42% of loans made in 2018 in this category last year had annual percentage rates of 100% or more, according to state data. The measure awaits a state Senate vote after a key Senate panel passed it in June.

Such action could suppress some of the fastest growing segments of the short-term lending industry. The number of unsecured consumer loans between $ 5,000 and $ 9,999 increased 26.2% in 2018 and the total dollar amount loaned increased 30.5%, according to the press release.

Lenders anticipating a Consumer Financial Protection Bureau rule on short-term loans have started offering financing that lasts several months rather than weeks. Payday loans in California are limited to 31 days.

The number of customers and the number of lenders fell, with the 1.62 million consumers at a nine-year low and the number of licensed locations falling 34%, according to state data.


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