Bad Credit Installment Loans Gain Market Share
As more and more payday lenders have shifted to offering bad credit installment loans instead of or along with payday loans, the market share for installment loans has increased substantially. For the past 20 years, payday loans have been a popular choice for small-dollar loans, especially among those with bad credit. However, in June 2016, the Consumer Financial Protection Bureau, also known as the CFPB, announced the release of proposed regulations that would alter the way that payday lenders conduct business. The CFPB’s actions came as no surprise to the industry; soon after the agency was born, it began broadcasting its intentions regarding the payday loan industry. However, the pending regulations are not the only reason for the growth of installment loans for bad credit borrowers.
Bad Credit Installment Loans Increasing Due to Pending Regulations
The CFPB announced in January 2012 that it would be expanding its bank supervision program to include nonbanks, a category that includes payday lenders. Installment loans have been rising every year since the announcement. According to Experian, in 2015, lenders made $24.2 billion in bad credit installment loans to people with credit scores of 660 or below. That is triple the value of these loans made during 2012 and 78 percent higher than 2014.
Installment Loans Are Rising Due to Consumer Preference
The Pew Charitable Trusts released the results of a survey conducted to determine how consumers felt about payday loans and installment loans applicants with bad credit. The survey found overwhelming support among consumers for installment payments over traditional payday loans. Approximately 90 percent of the respondents were in favor of installment payments rather than a lump-sum payment. About 79 percent preferred the option of only having to spend part of their paychecks to repay their loans, and 72 percent were in favor of requiring at least part of every payment to be applied to the principal.
Primary Differences Between Installment Loans for Bad Credit and Payday Loans
A payday loan is intended to be a very short-term loan that is normally repaid on the borrower’s next payday. The payment required will be the entire amount borrowed plus any applicable fees. This type of payment is sometimes called a balloon payment. Depending on the laws of the borrower’s state, if he is unable to pay the entire amount on his due date, he may be able to renew the loan by paying just the fees. In industry terminology, these loan renewals are called rollovers.
According to Investopedia, an installment loan is any type of loan featuring scheduled payments. Loans to purchase an automobile or a house are types of installment loans. Because payments are consistent throughout the term of the loan, most borrowers find budgeting for the payments is easier. Some installment loans for people with imperfect credit, such as mortgages and auto loans, are collateralized, which means that the lender can foreclose or repossess the pledged item should the borrower default on the loan. Other types of bad credit installment loans do not require collateral, and these are the form of installment loans to which most payday lenders have transitioned.
Why Many Consumers Prefer Installment Loans Over Payday Loans
For many people, the repayment of a payday loan means that most of one paycheck will be lost to paying just the one bill. This could place an undue hardship on the family or require the borrower to renew the loan, increasing the total amount it will cost to become free of the debt.
In many states, bad credit installment loans are regulated a bit more severely than payday loans. A number of state legislatures have enacted laws that limit the ratio of income to payments. For example, according to the Illinois Attorney General, the monthly payments on a payday installment loan cannot exceed 22.5 percent of the borrower’s monthly gross income.
How Pending CFPB Regulations Will Affect Installment Loans
The pending regulations proposed by the CFPB address certain types of bad credit installment loans as well as payday loans. If an installment loan has an annual percentage rate of at least 36 percent, the loan term is at least 45 days and the payments on that loan are made directly from the borrower’s account or paycheck, the new regulations will apply. These include:
• Determine the borrower’s ability to repay by verifying the borrower’s major financial obligations and income. Living expenses must be included in the consideration to ensure that the borrower has sufficient income to meet loan repayments as well as all other financial obligations.
• Lenders may waive the ability to repay requirement if the loan is between $200 and $1,000, the term is between 46 days and six months, the application fee does not exceed $20 and the annual percentage rate does not exceed 28 percent. Alternatively, if the loan term is between 46 days and 24 months, the annualized rate for interest and other fees does not exceed 36 percent, payments are due monthly and the lender’s default rate is not projected to exceed 5 percent, the ability to repay may be waived.
• Lenders will normally be required to notify the borrower a minimum of three days prior to accessing his account to collect a payment.
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