Payday loans are risky enough

Assemblyman Charles Calderon (D-Whittier) authored the 1996 bill that opened the door to payday lending — a short-term, extremely high-interest form of loan that must be repaid in full within a few weeks. Supporters say the loans help people deal with unanticipated expenses when they don’t have access to traditional forms of credit; critics say the easy-to-obtain loans push people with financial problems into deeper holes. Now Calderon is trying to hustle a new measure through the Assembly that would raise the cap that state law sets on the amount of a payday loan. It’s a bad idea that would make a costly form of borrowing riskier for consumers.

Calderon has played it coy with AB 1158, which initially proposed a meaningless change in the state’s credit union law, then was amended to regulate online advertisements for payday loans. On April 13, shortly before the Assembly went into recess, Calderon replaced the amended text with an entirely new version that would raise the cap on payday loans from $300 to $500. At his request, the Assembly’s banking committee is scheduled to vote on the measure Monday, the first day lawmakers are back in session.

Backers of the higher loan limit note that it’s not a new proposal. The Assembly had approved a bill in 2009 to increase the limit to $500 but also add a few consumer safeguards, such as the ability to return a loan without penalty within one business day. That bill died in the state Senate, and only the higher loan limit, not the safeguards, resurfaced in Calderon’s proposal.

Proponents argue that the limit, which hasn’t changed since the loans were legalized 15 years ago, is too low to meet many of the emergency needs that can lead someone to take out a payday loan. But the fundamental problem with such loans is that they can become a debt trap for those they appeal to the most: families whose finances are so thin that they can’t obtain a far less expensive form of credit from a bank or credit-card company.

A $300 loan from a payday lender costs $45 — the maximum amount allowed by law — and the fee is deducted immediately from the loan. The full $300 must be repaid shortly after the borrower’s next payday. Those who are living from paycheck to paycheck may not be able to repay the loan and have enough left over to cover their expenses in the short term. As a result, they’re more likely to take out another payday loan soon after paying off the first one; in fact, state records suggest that the average payday loan customer takes out more than seven a year. Increasing the maximum amount to $500 would only make it harder for those borrowers to break the cycle.

The state has rules against using payday loans to pay off payday loans, but they’re ineffective in guarding against sequential borrowing. At the very least, lawmakers should require the loans to be recorded in a state database to make sure borrowers obtain only one loan at a time, and they should put an annual limit on the number of loans per household to prevent people from taking out multiple loans in rapid succession. Once those protections are in place, then the Legislature can consider raising the limit on payday lending.