After medical bills for a leg amputation and kidney transplant wiped out most of her retirement nest egg, she found that her Social Security and small pension weren’t enough to make ends meet.
As the Marine Corps veteran waited for approval for a special pension from the Department of Veterans Affairs, she racked up debt with a series of increasingly pricey online loans.
In , the Rancho Santa Margarita resident borrowed $5,125 from Anaheim lender LoanMe at the eye-popping annual interest rate of 116%. The following month, she borrowed $2,501 installment loans Tennessee from Ohio firm Cash Central at an even higher APR: 183%.
“I don’t consider myself a dumb person,” said Hesson, 68. “I knew the rates were high, but I did it out of desperation.”
Not long ago, personal loans of this size with sky-high interest rates were nearly unheard of in California. But over the last decade, they’ve exploded in popularity as struggling households – typically with poor credit scores – have found a new source of quick cash from an emerging class of online lenders.
Unlike payday loans, which can carry even higher annual percentage rates but are capped in California at $300 and are designed to be paid off in a matter of weeks, installment loans are typically for several thousand dollars and structured to be repaid over a year or more. The end result is a loan that can cost many times the amount borrowed.
Hesson’s $5,125 loan was scheduled to be repaid over more than seven years, with $495 due monthly, for a total of $42, – that’s nearly $37,000 in interest.
“Access to credit of this kind is like giving starving people poisoned food,” said consumer advocate Margot Saunders, an attorney with the National Consumer Law Center. “It doesn’t really help, and it has devastating consequences.”
The number of loans between $5,000 and $10,000 with triple-digit rates also has seen a dramatic 5,500% increase, though they are less common
State lawmakers in 1985 removed an interest-rate cap on loans between $2,500 and $5,000. Now, more than half of all loans in that range carry triple-digit interest rates.
In 2009, Californians took out $214 million in installment loans of between $2,500 and $5,000, now the most common size of loan without a rate cap, according to the state Department of Business Oversight. In 2016, the volume hit $1.6 billion. Loans with triple-digit rates accounted for more than half, or $879 million – a nearly 40-fold increase since 2009.
Many of the loans can be tied to just three lenders, who account for half of the triple-digit interest rate loans in the popular $2,500-to-$5,000 size range. LoanMe, Cincinnati firm Check ‘n Go and Fort Worth’s Elevate Credit each issued more than $100 million in such loans in 2016, as well as tens of millions of dollars of loans up to $10,000 with triple-digit APRs.
Lenders argue they need to charge such high rates because the majority of these loans are unsecured: If borrowers stop paying, there are no assets for lenders to seize.
“Lenders don’t have a meaningful way to recover from a customer who walks away from it,” said Doug Clark, president of Check ‘n Go. “There’s a segment of the population that knows that and has no intention of paying us.”
For these borrowers, pawn shops and local storefront lenders used to be the most likely options, but those businesses can’t match the volume or convenience of today’s online lenders, which can reach millions of potential borrowers on the internet.
Many banks don’t offer personal loans at all – and certainly not to customers with weak credit looking for fast cash. After the financial crisis, banks reined in their credit card offers and stopped offering mortgages and home equity loans to customers with bad credit.
“Unfortunately, banks and other traditional lenders refuse to make needed loans to a large segment of the population,” LoanMe executive Jonathan Williams wrote in an emailed statement. “We believe that these borrowers should be given the option to borrow at these higher interest rates rather than lose access to all credit.”
The cap on the size of payday loans also has played a role. In California, after fees, the most a customer can walk away with is $255.
Clark of Check ‘n Go, which for years offered only payday loans, said many of his customers switched to installment loans once the company started offering them in 2010.
There’s a lot of room between $255 and $2,500. But many lenders – like LoanMe, Elevate and Check ‘n Go – simply choose not to offer loans in the middle, as they are subject to rate caps.
While California has strict rules governing payday loans, and a complicated system of interest-rate caps for installment loans of less than $2,500, there’s no limit to the amount of interest on bigger loans
High-cost lenders attract consumers in part by spending heavily on advertising, bombarding Californians with direct mail, radio jingles and TV ads promising easy money fast. LoanMe alone spent $40 million on advertising in California in 2016, according to its annual report to the Department of Business Oversight.
In one ad, LoanMe promised “from $2,600 to $100,000 in as fast as four hours with no collateral – even if you’ve had credit problems.”