It’s not the first time, and it certainly won’t be the last. The predatory lenders known as “payday lenders” are going to war against consumer advocates in Sacramento, California. This time, it’s over how to meet the needs of the citizens with financial difficulties that are not being serviced by conventional banks. Most of these Californians are low-income minorities, many of them with previously existing debt.
In 2017, lawmakers have begun introducing bills – in an attempt to change the rules for loans of less than $10,000. The goal is to bring attention to the plight of borrowers who:
- Are “unbanked” or “underbanked”
- Cannot qualify for a credit card
- Cannot qualify for a traditional bank loan
These people often find themselves targeted by two types of lenders: payday lenders, and consumer finance lenders. These lenders make credit lines available when few other options exist, while also creating real financial hazards.
What are they?
Known as the “bottom feeders” of the lending world – payday lenders are located mostly in neighborhoods with poverty rates that are higher than average. They assess enormous fees and require full repayment in two to four weeks. This equates to an APR of almost 400%, and means that those poverty-stricken Californians living from one paycheck to the next, will never be able to pay their loans off quickly. Thus more fees, and more poverty.
Consumer finance loans differ slightly, they offer installment loans which are paid off over time, but at a higher price. In 2015, California reported that more than half the loans worth $2500-5000 had interest rates greater than 100%. By the end of 2015, more than 40% of those loans were in default or past due.
California’s Long Battle
California law limits interest rates only on loans between $300 and $2,500, imposing a cap of about 32%. That limit is no lower than the ones in more than a dozen states that impose interest-rate caps, yet some lenders complain that it discourages them from lending to people with poor credit histories because there’s not enough margin to cover defaults.
In response, the state launched a pilot project in 2011 that allowed 36% interest (and higher fees) on instalment loans up to $2,500 from lenders that took steps to prevent consumers from taking out loans they couldn’t repay — something state law didn’t require of other lenders — and to help their customers improve their credit scores. The pilot, which also lets lenders pay “finders” to line up borrowers for them, has made more credit available while keeping defaults comparatively low.
What’s Happened this Year
After much review, lawmakers have filed at least three competing proposals this year to change the rules for consumer credit.
- The first aims to allow loan providers participating in the pilot project, offer larger loans with a 36% interest rate cap.
- Another would let payday lenders offer bigger loans and raise the interest-rate cap on loans under $2,500.
- The third would slap a 24% interest cap on all consumer installment loans under $10,000.
These lower-interest rates are considered a big win for the borrowers for California, and BMG Money is proud to already be operating within those parameters. We support nationwide initiatives aimed at wiping out payday lending.