Payday loans decline in Calif. as borrowers turn to installment products

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Cash-strapped Californians continue to migrate away from payday loans and toward larger installment loans, but they are not necessarily paying less to borrow.

Last year, consumers in the Golden State took out 10.2 million payday loans, the lowest number since 2006, according to data released Thursday. The number of payday loans made in California has declined for five straight years.

But part of last year’s decline was offset by an increase in consumer installment loans, many of which are quite expensive. In 2018, lenders made 1.19 million installment loans of between $500 and $9,999, which was up 12% from the previous year.

The annual increase was 10% for consumer installment loans of between $2,500 and $9,999, which generally do not have interest rate caps in California. Some 42% of the loans made in that category last year carried annual percentage rates of 100% of more, according to state data.

Manuel Alvarez, commissioner of the California Department of Business Oversight, said in a press release that the new data underscore the need to focus on the availability and regulation of small-dollar credit products, especially those over $2,500.

State lawmakers in Sacramento are currently considering legislation that would impose a rate cap of 36% plus the federal funds rate on installment loans of between $2,500 and $9,999.

The bill has the support of consumer advocacy groups and some lenders, but has drawn opposition from companies that typically charge higher interest rates. It was approved by the state Assembly in May and passed a key Senate committee in June.

The shift away from payday loans and toward longer-duration products may be partly a result of changes in the structure of the small-dollar lending business nationwide.

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 Consumer Financial Protection Bureau rule on short-term lending.

That proposal was developed during the Obama administration. The bureau’s current leadership has proposed changes that are favored by the payday industry.

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Small-dollar lending Payday lending State regulators State of California