Are California Payday Loans Still Dangerous in 2019?

Inside Subprime: May 20, 2019

By Lindsay Frankel 

Payday loans and other types of high-interest, non-bank loans are gaining popularity in California. While triple interest rate loans of less than $10,000 made up only 4 percent of non-bank consumer loans in 2009, by 2017 that figure rose to nearly one third, according to data received by state regulators.

Payday loans are short term loans that are intended to be paid back out of the borrower’s next paycheck. But most people can’t afford to pay the high interest rates on these loans while keeping up with their daily expenses, and about 80 percent of payday loans get renewed or rolled over. This leads to mounting interest and fees that trap borrowers in debt. The average annual interest rate charged on a payday loan in California is 411 percent, according to data from Pew Charitable Trusts.

Consumer advocates say that payday lenders prey on people who are financially desperate and have no other options. And those who are denied a loan from a traditional bank don’t have to look far to find a payday lender that will meet their needs; there are more than twice as many payday lenders in California as there are McDonald’s restaurants. But many consumer advocates say that borrowers with bad credit would be better off if the industry was eliminated altogether.

California payday lenders can legally charge borrowers annual interest rates of up to 450 percent, but the loan amounts are capped at $255 plus the fee. Loans between $300 and $2,500 must not have interest rates exceeding 30%, but larger loans can have triple digit interest rates, which encourages lenders to push borrowers into taking out more money than they might need.

A new bill introduced by Assemblywoman Monique Limon would limit interest rates on these larger loans to 45% including annual fees, which consumer advocates say would protect consumers from costly title loans in the state.

But relatively lax regulations allow payday lenders to still charge exorbitant interest rates. And while an Obama-era federal rule would have protected borrowers from loans deemed unaffordable, the Consumer Financial Protection Bureau announced a plan to rescind the underwriting requirements in February. In reaction to the deregulatory actions taken by the CFPB under the Trump administration, Assemblywoman Limon said lawmakers are considering creating a statewide-CFPB to further protect California consumers.

In the meantime, California residents should be aware of the risks of taking out a payday loan, and pursue all other alternatives to avoid falling into a debt trap.

Learn more about payday loans, scams, and cash advances by checking out our city and state financial guides, including California, Anaheim, Bakersfield, Chico, Fresno, Los Angeles, Modesto, Oakland, Redding, Riverside, Sacramento, San Diego, San Francisco, San Jose, Santa Barbara, and Stockton.