California proposes interest rate caps on small loans

Legislators proposed a cap for interest rates on loans less than $10,000 in California, but the ruling will not affect retail powersports lenders, David Gemperle, partner at Nisen & Eilliot, told Powersports Finance.

The California Senate Banking and Financial Institutions Committee approved a proposal that would set an annual interest rate cap for loans from $2,500 to $10,000. The state already limits interest on loans for less than $2,500, while larger loans are subject to rates as high as 200%.

Through the proposed rule, lenders could charge a maximum of 36% plus a 2.5% federal funds rate. If approved, California would join 39 other states that have interest rate caps on $10,000 loans with five-year terms.

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While powersports lenders doing business in California may underwrite loans under $10,000, the proposed rate cap would only affect direct lending, Gemperle said.

“It is a direct loan rule, so no impact on retail installment sales of powersports,” Gemperle explained. “Typically, direct lending for purchase money is through credit unions and banks, which are not subject to the rule. Any non-bank that does do direct loans would be impacted, and I am not aware of any that do so themselves in powersports.”

Additionally, the 36% limit with the federal funds occurs when it is an “all in” calculation, meaning that ancillary products are counted as interest, Gemperle added. The cap also affects only “very short term loans, which is typically outside of powersports, and only for cash rather than to buy a vehicle,” he said.

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