The discussion of “usury laws” on the California Attorney General’s website could lull a consumer seeking a loan into a false sense of security. “The California Constitution allows parties to contract for interest on a loan primarily for personal, family or household purposes at a rate not exceeding 10% per year,” according to the site.
But, as the webpage also points out, “Usury laws are complicated and there are many exceptions to the general rules.”
One of those exceptions is blasted on a “consumer advisory” webpage at California’s Department of Business Oversight, which warns (pdf), “Exercise caution before borrowing money through an automobile title loan. . . . Current state law does not limit interest rates for consumer loans of $2,500 or more. In 2013, virtually 100 percent (99.99 %) of auto title loans equaled or exceeded that threshold. The annualized interest rate on the vast majority of these loans ranged from 70% to 100% and higher.”
Californians have long been big fans of payday loans (pdf), short-term borrowing of under $300 at an annual rate of 459%. That adds up when you’re paying $15 to borrow $100 for two weeks. But lately, California borrowers have been borrowing more dollars under even more onerous conditions.
Auto title loans increased in California 140%, from 38,148 to 91,505, between 2011 and 2013. One in nine of those borrowers lost their vehicle in the transaction. California is one of 25 states that allow title loans. When a lot of states tightened up borrowing requirements on unscrupulous predatory loans after the Great Recession, California did not.
The Los Angeles Times described the lay of the land for those typically low-income workers who are looking to borrow more than $300 but perhaps not as much as they end up with. The newspaper profiled Jennifer Jordan, a Lemoore resident in the Central Valley, and her odyssey after asking Allied Cash Advance for a $400 loan to pay some monthly bills.
That was too small for them, but they did provide a $2,600 loan―$100 over the no-interest-limit threshhold―with her 2005 Buick Rendezvous SUV as collateral. They hauled her car away six months later.
Nationwide, more than 2 million drivers get the loan every year, according to Pew Charitable Trusts. They pay around 300% annualized interest but the killer is often the initial balloon payment of principal―usually around 50% of the borrower’s gross monthly income―due after a month.
That’s a tough nut to make, and a lot of people don’t. They pay a fee for the privilege of an extension with compounding interest. The loans are a regular way of life for a lot of users. Half of the borrowers reported using the money to pay bills and only a quarter said it was for an emergency, according to Pew.
The prevalence of predatory loans is a gauge of many things, none of them good: the desperation of the working poor; greed in the marketplace; the power of lobbyist money in government; the ignorance of the electorate; the fecklessness of lawmakers.
This is a story without a news hook. There is no pending legislation of note. No revelation of an evil, heretofore underestimated or unknown. No rolling thunder of media disapproval. No upswell of public resolve in the polls. It’s just another intractable problem that will only get worse as income inequality grows.