One might think the purported strength of the California economic recovery would translate to fewer folks using various high-cost lenders.
But one example of the divided nature of the economic rebound is seen in Californians’ continued heavy use of relatively expensive forms of borrowings – payday loans and other non-bank deals.
I tossed into my trusty spreadsheet some fresh statistics from the State Department of Business Oversight tracking three key consumer loans frequently used by folks in financial distress or simply seeking some quick, easy-to-get dollars. I learned that overall fewer borrowers are borrowing a larger sum.
First, there’s high-cost lending’s poster child: payday loans. Cash advances of up to $300 with annualized interest rates that averaged 372 percent. Sadly, that’s an improvement from the average 414 percent charged as the recession ended.
Next, I looked at unsecured consumer loans – typically up to $10,000, but they can be more. Often a somewhat cheaper borrowing option but 100 percent-plus interest rates are not unheard of.
And a new state test program – Responsible Small Dollar Loans – is a regulatory attempt to nudge lenders to provide loans between $300 and $2,499 with certain consumer-friendlier terms, including reporting payments to credit bureaus to improve the user’s bill-payment histories.
I’m pretty sure few people want to borrow money at these high costs for interest. But sometimes the alternatives are even financially weaker: from bouncing checks and incurring significant bank fees to missing work because car repairs can’t be paid for.
California lenders who make these higher cost loans served a combined 3.08 million customers in 2016 – and it’s a good bet there’s some overlap from folks who used various expensive lenders. That was essentially flat from 2015, but well above levels seen in 2012 to 2014.
These borrowers took out loans valued at $8.5 billion, down 15 percent in a year … but 2015 was the post-recession high.
Last year’s dip masks the growth of this lending business – something you’d think improving economic fundamentals wouldn’t let happen. While the number of customers fell by nearly 40 percent, yearly dollars lent soared $5 billion in six years – or a 139 percent jump.
Payday loans draw a lot of bad press – and for good reason – but it is not a growth business.
The number of individual payday customers was 1.8 million last year, down slightly from the year before. The number of transactions fell as well – don’t forget the typical borrower doing a payday deal makes six such transactions a year.
And the shrinking business means fewer lenders: 1,850 locations statewide last year, down 14 percent from 2010.
Some of that business went to folks who can lend more money. Non-bank unsecured loans is a hotspot for nontraditional lenders.
Last year, 1.08 million unsecured loans for $5.1 billion were made by regulated non-banks in California. Both figures were off from 2015, but that was this niche’s busiest year since the recession.
When you look back to 2010, you’ll see last year’s unsecured lending was quadruple in terms of loans done and up 12-fold in dollars lent. That helps explain why the roster of California’s licensed consumer loan makers has grown by 30 percent since 2010. And this sector has also benefited from growing offerings of online services, accounting for nearly half of 2016’s deals.
Finally, there’s the three-year-old experimental lending project still in infancy. This niche’s 201,000 loans for $242 million last year represented less than 3 percent of all the high-cost deals made by California lenders last year.
Department Commissioner Jan Lynn Owen expressed hope that Californians were gaining some financial relief from lower-cost products available outside the payday industry.
“While we don’t yet have any conclusive evidence, it seems logical and we would hope that more consumers are taking advantage of small-dollar loans available at much lower interest rates, including those participating in the Pilot Program for Responsible Small Dollar Loans.”
Let’s be honest. There are many reasons for the continued proliferation of this type of pricey lending.
Yes, an unsatisfying economic rebound has left many Californians in financial stress and in need of instant cash at nearly any price. And some people want to keep monetary secrets, whether those dealings be hidden from the government or loved ones.
These loans are risky and lenders get paid for taking it. For example, 4.6 percent of the checks given to payday lenders bounced. Roughly one-in-three unsecured loans were charged a late-payment fee last year. And 18 percent of the experimental program’s 2016 loans were paid late at one point.
But the traditional banking industry is part of the challenge, too. It’s done a poor job of expanding access to mainstream banking products to various “unbanked” groups, especially low-income households.
Even the basic products banks offer to the masses are commonly not very financially friendly. Fees of all sorts on small-balance bank accounts can sometimes make these high-cost deals at non-banks look competitive.
Collectively, it makes for business opportunities for nontraditional lenders. Yes, their products are expensive but they do oddly serve needs of folks who are unable to use traditional banks — or choose not to.