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California May Boost Payday Loan Allowances

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A payday loan is a controversial type of lending that has drawn scrutiny from consumer advocates and lawmakers across the country, and has most recently become a focal point in California.

The California legislature is now considering whether to raise an existing cap on the allowable size of payday loans within the state, according to a report from the Los Angeles Times. Currently, the state only allows payday lenders to extend borrowers up to $300 per line of credit, but advocates of the lending technique in the state are pushing lawmakers to increase that limit to $500, and Assemblyman Charles Calderon, a Democrat from Whittier, recently put a bill forward to do just that.

Experts in favor of the increased payday lending says current rules are outdated, and that because of the lack of flexibility would-be borrowers have in obtaining loans within the state, it forces them to instead seek this type of financing online, the report said. As such, they turn to unregulated lenders who could be in a position to gouge borrowers.

On the other hand, opponents of the bill point to recent studies that have shown state restrictions don’t push large numbers of payday loan borrowers to online lenders, the report said. Further, they say that if the cap were to be raised, there would also need to be a limit placed on the number of loans such a borrower could obtain per year. A recent federal recommendation would have the number capped at six.

Further, consumer advocacy groups also believe that there need to be more additions to Calderon’s bill, the report said. These may include longer repayment periods and rules that dictate how lenders verify that a borrower can afford to pay back loans of whatever value they obtain. Proponents of the bill say these measures would be too great, but have offered smaller concessions.

Payday lending can often be problematic for borrowers because while these loans are for relatively small amounts of money, those who have relatively low incomes, who may not be able to afford the payments on such a quick turnaround, often seek them out. Exacerbating the problem is that these loans often come with interest rates higher than most other types of credit, meaning that balances can add up quickly if not addressed in a short period of time.

Image: PinkMoose, via Flickr

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