A new report found a dramatic decrease in Californians‘ reliance on payday loans as a direct result of pandemic-related government assistance, including unemployment benefits, rent relief, eviction moratoriums, stimulus checks and loan forbearance. But experts warn that use of payday loans is expected to rebound once government assistance ends.
Pandemic government assistance may have helped some Californians avoid using expensive payday loans last year, but some experts say it might be too early to celebrate.
A new report found that in 2020, California saw a 40% , a drop equivalent to $1.1 billion. Almost half a million fewer people didn’t rely on payday loans, a 30% drop compared to 2019.
Despite the unprecedented job loss triggered by the pandemic last year, government-funded financial aid was enough to acutely impact the payday loan industry, according to the California Department of Financial Protection and Innovation. The new state department released the report last week as part of its ongoing effort to regulate and oversee consumer financial products.
The report comes on the heels of California’s new $262.6 billion budget, with multiple programs aimed at reducing economic inequality within the state. An unprecedented $11.9 billion will be spent on Golden State Stimulus payments, a one-time benefit not set to continue in years to come.
“With those benefits going away, we do expect there to be potentially an uptick (in payday loans),” said department spokesperson Maria Luisa Cesar.
Industry representatives, state regulators and consumer advocates agree: government assistance helped Californians avoid their reliance on payday loans-short-term, high-interest loans that must be paid back in full when borrowers get their next paycheck. Additional reports found that California’s trend mirrors trends in other states.
Thomas Leonard, executive director of the California Financial Service Providers Association, said that 2020 was a difficult year for the industry because the pandemic changed how consumers managed their finances. His association represents providers of small-dollar consumer loans, payday loans, check cashing and other consumer financial services.
“Demand for small-dollar loans dropped precipitously in 2020, as many consumers stayed home, paid down debt, managed fewer expenses, and received direct payments from the government,” Leonard said in a statement.
On the other hand, Cesar said that the drop in payday loan use is not necessarily indicative of Californians doing better financially.
“That’s just too simplistic of a picture,” she said. “Cash relief efforts were able to help consumers make ends meet, but folks are not out of the woods.”
Marisabel Torres, the California policy director for the Center for Responsible Lending, said that despite the impact pandemic relief had on Californians, some of those programs already have an end date. California’s eviction moratorium, for example, is scheduled to end Sept. 30. The rollout of rental assistance has been slow. Tenants with unpaid rent are facing potential eviction for those who can’t afford to pay rent.
With the exception of last year, the report showed that the usage of payday loans has remained stable for the last 10 years. But the use of payday loans doubled in the years following the Great Recession.
The state report provides no context about how consumers used payday loan money in 2020, but a study by the Pew Charitable Trust in 2012 found that 69% of customers use the funds for recurring expenses including rent, groceries and bills.
Almost half of all payday loan customers in 2020 had an average annual income of less than $30,000 a year, and 30% of customers earned $20,000 or less a year. The annual reports also consistently show higher usage among customer’s payday loans in Waterville without bank account making more than $90,000 per year, though the financial oversight department wasn’t able to explain why.