California passes new rules that cap payday loan interest at 36%September 13, 2019
More than 23 million people relied on at least one payday loan last year. On Friday, Sep. 13, California passed legislation that would make these loans less expensive for residents.
The California State Legislature passed the Fair Access to Credit Act, which blocks lenders from charging more than 36% on loans of $2,500 to $10,000. Previously, there was no interest rate cap on loans over $2,500, and the state’s Department of Business Oversight found over half of these loans carried annual percentage rates of 100% or more.
Payday loans are typically small, personal loans consisting of a few hundred dollars, and for some they can be the only way to get cash quickly. You can get these in most states by walking into a lender’s store with a valid ID, proof of income and a bank account. No physical collateral is needed. In recent years, lenders have even made them available online.
Personal loans were the fastest-growing debt category among all consumers in 2018, bigger than auto loans, credit cards, mortgages and student loans, according to credit agency Experian. But payday loans can be extremely risky, in large part because of the expense: The national average APR for a payday loan is almost 400%. That’s over 20 times the average credit card interest rate.
The high cost of these loans, and their short repayment period, means that it’s easy to get sucked into a cycle of taking out loans and rolling them over instead of paying them off.
“The California Legislature took a historic step today toward curbing predatory lending,” Marisabel Torres, California policy director for the Center for Responsible Lending, a nonprofit, said Friday, adding she hopes Governor Gavin Newsom acts quickly and signs this bill into law.
Why lawmakers are taking on payday loans
Payday lending is not a new phenomenon, and there are already federal and state laws on the books to help consumers. But payday loans have been a hotly contested issue since the Consumer Financial Protection Bureau (CFPB), the government agency tasked with regulating financial companies, said it planned to revisit Obama-era payday loan stipulations that required lenders to ensure borrowers could repay their loans before issuing cash advances.
That rankled many federal Democratic lawmakers, who argued the agency isn’t upholding its mandate. So much so, Democrats on the U.S. House Committee on Financial Services also rolled out federal draft legislation in May that, among other things, would cap the APR rate for payday loans nationally at 36%, about double the current credit-card APR.
“I’m not saying to you that all payday lenders are loan sharks, but a good many are,” Rep. Al Green (D-Texas) said during the May committee hearing on the legislation. “They have found a way to feast on the poor, the underprivileged and the people who are trying to make it.”
Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Sen. Bernie Sanders (D-Vt.) also introduced new legislation in May taking aim at payday loans. They jointly…