Allies of payday lenders are urging the state Legislature again to raise the cap on the high-interest loans, enabling desperate borrowers to dig themselves into even deeper holes. It's a bad idea, and lawmakers shouldn't consider raising the current limit on lending without more meaningful consumer protections than the bill's sponsor has proposed.
In a payday loan, a customer borrows up to $300, but receives 15% less than the face value of the loan — that's the lender's fee. The borrower agrees to pay the lender the full face value within two weeks, after his or her next payday. The problem with these loans, beyond their extraordinarily high interest rate (more than 400% in annual terms), is that the short repayment period doesn't allow borrowers to spread the cost over time. As a result, some borrowers find themselves taking out loan after loan after loan, caught in a debt trap they can't escape.
AB 1158, by Assemblyman Charles Calderon (D-Whittier), would raise the maximum to $500. Supporters argue that the state's cap is outdated and that borrowers needing more cash are flocking to unregulated lenders online. But the Pew State Small-Dollar Loans Research Project found that state restrictions on payday lenders don't cause many would-be borrowers to look elsewhere. And without real protections against repeat borrowing — including a limit of six payday loans per year, as federal regulators have recommended, and a centralized record of loans issued to help enforce the limit — raising the state's cap would only sink people into deeper trouble.