Californians relied less heavily on payday loans in 2017, according to new data that could reflect the state’s strong economy as well as recent changes in the structure of the small-dollar loan industry.

The number of payday loans in the nation’s largest state fell by 6.7% from the previous year to 10.73 million, the California Department of Business Oversight said Friday. The amount of money lent by payday lenders in California fell by roughly the same percentage, according to the data.

Jan Lynn Owen, the department’s commissioner, sounded happy to learn that Californians are using the high-cost, short-term loans less frequently.

“Few outside the industry may mourn payday lending’s shrinkage in California,” Owen said in a press release. “Nevertheless, the trend highlights the importance of policymakers and stakeholders working together to increase consumers’ access to lower-cost, small dollar financing products.”

Payday advance storefront
The reduction of payday loans in California may be due to consumers seeking out high-cost installment credit. Bloomberg News

The state’s report did not address the causes of the payday industry’s decline in California, which began in 2016. But multiple trends may be converging to contribute.

California’s economy has been humming along, which suggests that workers are more likely to have enough money in their pockets each week. The state’s 4.3% unemployment rate in March tied its lowest level in more than 40 years.

Changes in the structure of the small-dollar lending business may also be a factor. In recent years, many high-cost consumer lenders have started offering loans that have terms of several months, rather than just a few weeks, in anticipation of the implementation of a pending Consumer Financial Protection Bureau rule on short-term lending.

So it is likely the case that at least some borrowers who previously turned to payday loans are now using high-cost installment credit.

The number of consumer installment loans of between $2,500 and $10,000 in California rose by 6.5% between 2016 and 2017, according to a separate report from the state Department of Business Oversight, which was released earlier this month. A majority of those loans had annual percentage rates of 70% or higher.

Last month, the California Assembly narrowly defeated a bill that would have banned high-cost consumer installment loans of between $2,500 and $10,000.

California also appears to be having some success in encouraging lower-cost options for cash-strapped consumers. Borrowers have been making greater use of a pilot program created in 2013 to increase consumer access to loans of under $2,500, according to state data.

More than 230,000 loans were made under the pilot program in 2017, up 18.2% from two years earlier. Interest rates on those loans varied, with APRs on loans under $1,000 usually exceeding 50%, while APRs on larger loans were most often between 30% and 50%.

The report released Friday showed that 83.1% of all California payday loans in 2017 were “churned,” which means that they were taken out by consumers who had already borrowed from the payday lender in a previous transaction. Payday lenders are frequently criticized for trapping borrowers in a cycle of repeat borrowing.

The report also stated the number of licensed payday loan shops in California fell by 8% to 1,705 last year. Like banks, payday lenders have started relying more heavily on digital channels. In 2017, 21.4% of licensed payday loans in California were made online, up from 17.8% the previous year.

Payday lending is legal in more than 30 states, but many of them do not publish annual loan volumes, which has made it difficult to measure industrywide trends.

Kate Berry contributed to this report.

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