California law restricts how much interest lenders can demand for installment loans under $2,500, but above that amount, the sky’s the limit for non-bank lenders. As a result, most loans of $2,500 to $5,000 from these companies — the most popular amount, according to state statistics — carry interest rates of more than 100% per year. Put another way, these loans typically force consumers to pay far more in interest than they borrowed in the first place.
That’s greed run amok, especially considering that many of these borrowers live paycheck to paycheck and can’t afford the enormous premium some lenders demand.
A succession of California lawmakers has tried to close this loophole in the law, only to be stymied by opposition from high-interest lenders. Assemblywoman Monique Limón (D-Santa Barbara) is trying again this year with a bill (Assembly Bill 539) that would cap interest rates at roughly 38% for loans between $2,500 and $10,000, plus an administrative fee of up to $75. As a compromise, the bill would not bar lenders from selling add-on products such as credit insurance, which can raise the effective interest rates borrowers pay.
The supposed rationale for allowing unlimited-interest loans is that it helps people shunned by conventional banks — in other words, those with bad credit or no credit — obtain the money they need to cope with financial emergencies. But high-interest loans can easily become debt traps for people who struggle to make ends meet under normal circumstances, let alone having to cope with a hospital bill, major car repairs or other unexpected burdens.
And as we’ve seen from lenders in other states — and even from some in California — these borrowers can be profitably served without charging confiscatory rates and fees. Granted, it requires lenders to size their loans and set their terms according to borrowers’ ability to repay, rather than expecting borrowers to default in droves and counting on enormous interest charges paid by the rest to offset those losses. But that sort of heedless lending has been rejected by nearly 40 other states that have imposed interest-rate caps.
The state Supreme Court held last year that high-interest loans could be considered “unconscionable,” and therefore in violation of state law, but it didn’t say how high the rates must be to reach that threshold. Limon’s bill, which passed the Assembly last month, would provide that clarity. The Senate should resist the push from some lenders to weaken the bill, and instead send it to Gov. Gavin Newsom to sign into law.
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