“Demand for small dollar loans fell precipitously in 2020 as many consumers stayed home, paid off debt, managed fewer expenses and received direct government payments,” Leonard said in a statement.
On the other hand, Cesar said the decline in the use of payday loans isn’t necessarily indicative of Californians’ financial improvement.
“It’s just too simplistic of a picture,” she said. “Cash relief efforts may have helped consumers make ends meet, but people are not off the hook.”
Marisabel Torres, California policy director for the responsible credit center, said that despite the impact of pandemic relief on Californians, some of these programs already have an end date. California moratorium on evictions, for example, is set to end on September 30. The rollout of rental assistance has been slow. Tenants whose rent is unpaid face potential eviction for those who cannot afford to pay rent.
Once these programs are cut, Torres said, people will continue to need financial help.
“There’s still this large population of people who will continue to gravitate toward these products,” Torres said.
With the exception of last year, the report showed that the use of payday loans 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 doesn’t provide any context on how consumers used payday loan money in 2020, but a study by Pew Charitable Trusts in 2012 revealed that 69% of clients use the funds for recurring expenses, including rent, groceries and bills.
Nearly half of all payday loan customers in 2020 had an average annual income of less than $30,000 per year, and 30% of customers earned $20,000 or less per year. Annual reports also consistently show higher usage among customers earning more than $90,000 a year, though the Financial Monitoring Service was unable to explain why.
“Basic necessities, like groceries, rent… To live life, you have to pay for those things,” Torres said. “Anything that alleviates this economic pressure is helpful to people.”
Lawmakers across California have begun establishing pilot programs that would alleviate some of that economic pressure. Stockton was the first town to experiment with a guaranteed income for its residents. Compton, Long Beach and Oakland followed suit across the 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 among the most expensive and financially dangerous loans that consumers can use. Experts say the decline in usage last year is good for Californians, but the industry still lacks the regulations needed to reduce lending risk for low-income consumers.
California lawmakers have a long story to try to regulate predatory loan in the state, but have failed to enact significant consumer protections 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 averaged 361% in 2020.
In addition to exorbitant interest rates, one of the industry’s biggest sources of revenue is fees, especially from people who are serially dependent on payday loans.
A total of $164.7 million in transaction fees — 66% of industry fee revenue — came from customers who took out seven or more loans in 2020. About 55% of customers opened a new loan on the day even from the end of their previous loan.
After several unsuccessful attempts over the years to regulate the industry, California lawmakers are not pursuing major reforms this session to tackle the industry. Torres called for continued legislative efforts that would cap interest rates as a way to alleviate what she calls the debt trap.
“It’s crazy to think that a decision maker would see this and say, ‘That’s OK. It’s OK for my constituents to live under these circumstances,” Torres said. “While it is actually within the power of California policy makers to change that.
Alternatives to payday loans
There is evidence that declining payday activity correlates with COVID-19 relief efforts. While there are a number of factors in the decrease, they likely include the distribution of stimulus checks, loan forbearances and the growth of alternative financing options. More commonly known as “early wage access,” the new industry claims this is a safer alternative.
Companies lend part of a customer’s salary through phone apps and do not charge interest fees. The product is not yet regulated, but the state financial monitoring agency has announced that it start surveying five companies that currently provide the service.
The problem with this model, according to Torres, is that there is no direct fee structure. To make a profit, the apps require customers to tip for the service.
“Unfortunately, that tip often masks the ultimate cost of the loan,” Torres said, adding that some businesses go so far as to use psychological tactics to encourage customers to leave a big tip.
“Customers expressed their relief knowing that our industry was always there for them in the most difficult of circumstances and we were proud to be there during this time of need,” Leonard said.
Despite last year’s downturn, 1.1 million customers borrowed a total of $1.7 billion in payday loans last year, with 75% returning for at least another loan 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 customer’s ability to repay the loan would also prevent customers from falling into a debt trap, she said.
“They act like they’re providing that lifeline to somebody,” Torres said. “It’s not a lifesaver. They tie (customers) down with an anchor.