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California Ranks Second in The U.S. For Household Debt

By Lisbeth Mora, California Business Journal

California, known for its vibrant cities, diverse landscapes, and booming economy, paradoxically faces a significant challenge when it comes to the financial well-being of its residents.

Recent statistics reveal that people in California rank second in the amount of household debt at an average of $84,000, just behind Hawaii and ahead of other costly states including Oregon, Maryland and Colorado.

This phenomenon can be attributed to a combination of factors, including the accessibility of high cost loans, the soaring cost of living, and societal pressures that drive a culture of conspicuous consumption.

Access to High Cost Credit

One of the factors contributing to California’s higher debt levels is the legality and popularity of payday loans.

In California, subprime loans are legal and widely available. These short-term, high-interest loans often appeal to individuals facing urgent financial needs but can lead to a cycle of debt due to their exorbitant interest rates. According to Dollar Hand, the average annual percentage rate (APR) for subprime loans in California is approximately 372%, making them a financially burdensome option for many residents.

Statistics indicate that a significant portion of Californians turns to high cost loans and credit cards, leading to increased debt levels.

According to the California Department of Business Oversight, in 2021, over 2 million loans were issued, totaling nearly $2.8 billion in loan volume. This widespread reliance on high-interest borrowing contributes to the overall debt burden faced by individuals in the state.

Cost of Living Challenges

The cost of living in California is notoriously high, driven by factors such as housing costs, healthcare expenses, and transportation. Housing, in particular, poses a significant financial challenge, with skyrocketing home prices and rents in major metropolitan areas like San Francisco, Los Angeles, and San Diego.

According to the U.S. Bureau of Economic Analysis, California consistently ranks among the states with the highest cost of living index. In 2021, the cost of living in California was estimated to be 19% higher than the national average. The strain on household budgets due to elevated living costs contributes to residents accumulating debt as they grapple with the day-to-day expenses associated with living in the Golden State.

The state of California also has the highest number of startup businesses in the country, which can often leave founders cash trapped or living thin when taking on high risk ventures, with high failure rates.

Keeping Up with the Joneses: Societal Pressures

California has a reputation for glamor and affluence, fosters a culture where societal pressures to “keep up with the Joneses” are palpable. The desire to maintain a certain standard of living and conform to societal expectations can lead individuals to make lifestyle choices that stretch their finances beyond their means.

The pressure to achieve a certain level of material success and live up to the perceived Californian lifestyle can result in individuals taking on debt to finance expenditures that may not be sustainable. Consumer culture and the allure of a particular lifestyle contribute to a willingness to borrow to maintain appearances, adding to the overall debt burden in the state.

Student Loan Debt

California is home to numerous prestigious educational institutions, and many residents pursue higher education. However, this pursuit often comes with a significant financial cost. According to the Institute for College Access and Success, the average student loan debt for graduates in California is higher than the national average. As of 2021, the average debt for California graduates was around $23,303, contributing to the overall debt landscape in the state.

The higher debt levels experienced by individuals in California stem from a complex interplay of factors, including the prevalence of payday loans, the exorbitant cost of living, societal pressures, and substantial student loan burdens.

While the state’s economic opportunities and cultural allure are undeniable, addressing the challenges associated with debt will require a multi-faceted approach, including regulatory considerations, financial education initiatives, and efforts to alleviate the housing affordability crisis. Understanding the root causes of California’s higher debt levels is crucial for policymakers, financial institutions, and individuals seeking to navigate the financial landscape effectively.