Bill Proposed that Would Increase Limit on Payday Loans

Supporters of payday lenders are advising the state Legislature to increase the restriction on the high-interest loans, allowing distressed borrowers to be in much deeper debt. It is not a good idea and lawmakers must not think about increasing the present restriction on lending without more meaningful consumer protections than the sponsor of the bill has suggested.

When getting a payday loan, a person can borrow as much as $300 but actually receives less than 15 percent of the face value of the loan, which is the lender’s fee. The term of payday loan is typically two weeks after the borrower’s next payday.

However, the problem with these loans, besides the excessive interest rates of over 400 percent annually, is that the short repayment period disables borrowers to distribute the cost over time. Consequently, a few borrowers take on loans one after the other, and find themselves in a debt trap.

The bill, AB 1158, which was proposed by Assemblyman Charles Calderon, would increase the restriction to $500. Supporters claim that the state’s restriction is out-of-date and that borrowers who need more cash are turning to unregulated lenders online.

The Pew State Small-Dollar Loans Research Project discovered that state limits on payday lenders don’t bring about would-be borrowers to look around for other lenders. Moreover, the increase in the state’s restriction would only cause borrowers to be in deeper debt, especially without real protections against repeat borrowing – such as a restriction of six payday loans annually and a centralized record of loans released to assist in implementing the restriction.

Calderon was asked by AARP’s California branch, Consumers Union and Western Center on Law and Poverty to discontinue the bill except if he includes a six-loan restriction, a longer repayment period and an order that lenders evaluate a borrower’s ability to repay prior to giving a loan.

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