Payday Loan Usage in California Dropped in 2021, but Increase in 2022

People around the world are different in many ways, but we do have some things in common. A problem such as lack of money flow unites us all. 

Some countries have advanced economies and higher standards of living. However, not everyone in a country is a millionaire. The average Californian occasionally struggles to cover all his expenses. Because of this, people look for alternatives to help them solve the problem. Most individuals are likely to decide to take out a payday loan.

Payday lending is a $40 billion dollar industry. At its best, such lending takes advantage of borrowers who have no cash or access to credit. At its worst, it’s a scam.

Сalifornia Payday Loan Laws and Regulations

In California, lenders can make loans of up to $300 for up to 31 days and charge a fee of no more than $45. Although this fee may seem low, the average annual percentage rate for payday loans is 372%. This rate is much higher than on most other loans or credit cards. One of the rules of lending is that the lender cannot offer you a new cash loan if you have not settled the first one. 

Compared to many other states, California’s payday loan laws are clear and simple. There are well-defined restrictions on the amount of principal and finance charges that can be allowed to make up the cost of your loan. Unfortunately, however, they are not strict enough to protect anyone, as lenders still have the right to legally charge triple-digit interest rates.

Payday Loans in California 2021

On July 22, 2021, the Department of Financial Protection and Innovation (DFPI) released to the public its Annual Report on Payday Lending under California’s Deferred Deposit Transaction Act. Traditional storefront lenders, providing 400% annual percentage rates on loans, steep fees, and two-week payment plans, were in decline across the country. But the pandemic activated these trends. It is believed that the loss of nearly half of payday loan dollar volume is due to the pandemic for a number of reasons, which may include such factors as loan deferrals, stimulus checks, and growth in alternative financing options.

Less than 6.1 million payday loans were processed during calendar year 2020, indicating a 40% decline in loans and a 30% decline in customers compared to the same period in calendar year 2019. 

Experts claim that the decline in credit usage last year has benefited California residents, but the industry still lacks proper regulation to reduce credit risk for low-income customers. Despite the unprecedented job loss triggered by the pandemic, government-funded financial aid was enough to acutely impact the payday loan industry. 2020 was a challenging year for the industry as the pandemic changed the way consumers manage their finances. Over the past months, Congress has passed measures to increase unemployment benefits, federal stimulus payments, an eviction moratorium, and deferrals on student loans and mortgages, reducing the need for high-cost loans. As many consumers stayed home, paid off debts, cut back on expenses, and received direct payments from the government, demand for small-dollar loans dropped sharply in 2020. However, the decline in payday loan use is not necessarily an indication that Californians have become better off financially. Despite last year’s drop in activity, 75% of customers returned for at least one more loan within the same year. Most of the federal government’s support has already ended. Payday lenders who became unintended casualties of the pandemic were eagerly awaiting the end to most government relief programs. However, many people managed to increase their savings, which meant they didn’t have to go straight back to high-cost lenders. The Biden administration and congressional Democrats approved an expanded child tax credit that transfers up to $300 per child into families’ bank accounts monthly. When you consider that the most active payday lending periods are when children are back in school and before Christmas, the child tax credit could help reduce demand for payday and other high-cost loans for families with children.

Changes in California Payday Loan Industry in 2022

Let’s check how Payday Loans query had been changing in California since 2021.

Nevertheless, high-cost lenders could see their volumes rise again in 2022. One factor that could affect the resurgence of high-cost lending is increased regulatory oversight, both by the Consumer Financial Protection Bureau and states. 

The CFPB said it plans to reinvigorate its oversight and enforcement of the short-term, small-dollar loan market, including potentially new rule making.

Since 2016, South Dakota, Colorado, Nebraska, and Illinois have instituted 36% interest rate caps on loans, and other states are considering such moves. On Capitol Hill, Democrats have introduced legislation for a 36% federal rate cap, but that is unlikely to make it through Congress.

The global payday loan market is projected to reach USD 42.6 billion by 2028. According to world forecasts, the global market is expected to grow at a compound annual growth rate (CAGR) of 4.1%.