Breanna Reeves |

California payday lenders experienced a sharp decline in loans and borrowers in 2020 during the pandemic despite the initial rates of job loss and unemployment.

The Department of Financial Protections and Innovation (DFPI) reported a 40 percent decline in payday loans in 2020, according to their 2020 Annual Report of Payday Lending Activity.

“Payday loans are believed to have decreased during the pandemic for a number of reasons that may include factors such as stimulus checks, loan forbearances, and growth in alternative financing options,” said DFPI Acting Commissioner, Christopher S. Shultz, in a press release. 

Payday lenders experienced a loss of over $1.1 billion dollars according to 2019 total dollar amounts of payday loans. 

Pandemic Stimulus Provided Short-term Relief

“That decrease is probably a combination of additional government payments, like the stimulus checks, and enhanced unemployment. Also, there are lower consequences for inability to pay your rent, or your student loans, and in some cases your utilities,” explained Gabriel Kravitz, an officer of the Pew Charitable Trusts’ consumer finance project. “Our research shows that seven in 10 borrowers are taking out these loans to pay for those recurring bills.”

California residents’ dwindling dependence on payday loans may be attributed to federal and state-wide stimulus and rental assistance programs that assisted millions of people with paying rent and utilities and other pressing bills. However, such protections have ended or will soon end with the state returning to business as usual.

“As the pandemic provisions are winding down, it is likely that we’re going to see a rebound in the volume of loans and the number of borrowers,” said Kravitz.

California is one of 14 states with high payday loan interest rates, according to the Center for Responsible Lending (CRL). The CRL categorizes these states as “fall(ing) within the debt trap of payday loan interest rates.”

California borrowers experience some of the highest APR rates in the country. (Source: Map and data courtesy of the Center for Responsible Lending.)

State data for 2020 found that the average California borrower who took out a loan of $246 was in debt for 3 months of the year and paid $224 in fees alone, a total repayment of $470. Although the loan is advertised as being due in two weeks, it is actually due all at once, according to Kravitz.

“And that takes up about a quarter of the typical California borrower’s paycheck. And it’s very difficult for someone who’s struggling to make ends meet to lose a quarter of their paycheck, and still pay the bills like rent (or) buy groceries,” said Kravitz. “And so what ends up happening is, oftentimes, the borrower will take out another loan, on the same day and end up in debt for months instead of just two weeks.”

Who’s Affected?

A report conducted in 2012 by the Pew Charitable Trust identified research findings on payday lending, including who borrows and why. 

One notable finding the report discovered was aside from the fact most payday loan borrowers are White, female and between the ages of 25 to 44, “there were five other groups that had higher odds of using payday loans: those without a four-year college degree, renters, African Americans, those earning below $40,000 annually and those who are separated or divorced.”

“And we also know specifically in communities of color, Black communities, Brown communities, that payday loan resellers have (been) located in these communities for quite some time,” explained Charla Rios, a researcher at the CRL who focuses on payday lending and predatory debt practices. “So they may market themselves as access to quick cash, but we know the harms that have exacerbated the racial wealth gap for these communities for quite some time.”

Research from 2016 by the California Department of Business Oversight found that there are higher numbers of loan retailers per the population in communities of color than their white counterparts.

“Almost half of payday storefronts were located in zip codes where the family poverty rate for Blacks and Latinos exceeded the statewide rate for those groups,” the report noted.

This table displays the average APR rates for payday loans in California. In 2020 APRs decreased to 361 percent in 2020 from 369 percent in 2019. (Source: Table courtesy of the California Department of Financial Protection and Innovation)

“I think the really important data point from that California 2020 report is that the bulk of the revenue, 66 percent of the revenue, is being generated from borrowers who took out seven or more loans during 2020. And that shows the harm of that unaffordable initial loan, that first unaffordable loan generates additional loans in a sequence,” stated Kravitz. “And that’s where the bulk of the revenue is coming from and that’s the core of the problem.”

Although California has capped payday loans at $300, payday loans are considered to be financial traps for consumers, especially those with lower incomes, despite being labelled a “short-term” loan. Borrowers in California are charged two to three times more than borrowers in other states with reformed payday lending legislation. 

Payday Loan Protections

Consumer protections for small dollar loans in California are nearly nonexistent, with the exception of the $300 payday loan cap and requirement of licences from lenders. SB 482, legislation for restrictions on consumer loans, was introduced in the state in 2019, but died in the senate in 2020.

In 2019 California instituted a 36 percent rate cap for large dollar amount loans between $2,500 and $9,999 under the Fair Access to Credit Act, but Rios explained extending these protections to small dollar loans would be beneficial to consumers.

In 2017 the Consumer Financial Protection Bureau (CFPB) introduced a rule that allowed lenders to determine if a borrower had the ability to repay a loan before approving the loan. However, in 2020, the CFPB rule was amended to clarify prohibitions and practices by debt collectors, eliminating some protections that were initially in place. 

“The CFPB currently doesn’t have any kind of payday rule in place that would be protective of consumers. And that’s a really important point because (the 2017 rule) would have guaranteed some look at the ability to repay these kinds of loans, which really plays into, kind of, that cycle of the debt trap and the fact that payday lenders are not looking at a person’s ability to repay the loan before issuing the loan,” said Rios. “And thus starts the cycle.”

Pew Charitable Trust research shows that the CFPB and California lawmakers have the opportunity to make small loans affordable and safer by implementing more regulations and instating longer installment windows.

According to Pew, in 2010 Colorado reformed their two-week payday loans by replacing them with six-month installment payday loans with interest rates nearly two-thirds lower than before. Now, the average borrower in Colorado pays four percent of their next paycheck toward the loan instead of 38 percent.

“I think probably the most important thing to focus on right now is what federal regulators can do: the Consumer Financial Protection Bureau can quickly reinstate its 2017 payday loan rule that would strongly protect consumers from the harms of those two week payday loans,” said Kravitz.

Breanna Reeves is a reporter in Riverside, California, and uses data-driven reporting to cover issues that affect the lives of Black Californians. Breanna joins Black Voice News as a Report for America Corps member. Previously, Breanna reported on activism and social inequality in San Francisco and Los Angeles, her hometown. Breanna graduated from San Francisco State University with a bachelor’s degree in Print & Online Journalism. She received her master’s degree in Politics and Communication from the London School of Economics. Contact Breanna with tips, comments or concerns at breanna@voicemediaventures.com or via twitter @_breereeves.

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