Are High Interest Installment Loans any Better than Payday Loans?
Increased state and federal regulations are forcing many short-term loan lenders to switch their business tactics. Instead of offering traditional payday loans, these lenders are transitioning into providing installment loans. Are high interest installment loans better than payday loans? The answer to this question comes down to the consumer and his or her needs.
What Makes High Interest Installment Loans Better than Payday Loans?
When it comes to high interest installment loans, they may be a better choice than payday loans because of the extended repayment time. Bloomberg confirms that unlike payday loans, installment loans have repayment terms that range from 90 days to 18 months. However, to get a lengthier loan, the borrower must usually consent to income verification and a credit check, so those who have blemishes on their credit reports may hesitate to apply for this kind of loan. In this situation, a payday loan may be better.
Second-Generation Loan Products
Traditional payday lenders entered into the installment loan market to offer consumers an alternative to short-term payday loans. Because installment loans feature extended payoff terms, they are not usually subject to the same government consumer protections that regulate most of today’s payday loans.
According to Propublica, one payday lender confirmed that five to six years ago, the company’s payday loans accounted for approximately 90 percent of all the loans that the company issued. In 2013, the company’s payday loan numbers had dropped to around half of all its loans. The decrease came from the company shifting into second-generation loan products like installment loans. John Hecht, an investment bank analyst, commented on the benefits of these loans for lenders. He said, “You’re diversifying the revenue sources while also shedding regulatory risk.”
Comparing High Interest Installment Loans to Payday Loans
One major difference between installment loans and payday loans is that payday loans are unsecured funds while installment loans require borrowers to secure funds with a car title or the title to a piece of personal property. Some state laws place limits on what borrowers can use as collateral for these loans. When consumers use a title to secure a loan, they can lose their collateral for failing to repay it.
The ability to repay the loan over a few months instead of within a week or two is another difference between the two types of loans. The last major difference is that borrowers can renew installment loans after making several payments. When they do, the loan amount may increase, but more repayment time will be provided. Some states do permit renewals for payday loans, but the borrower will face added fees as well as a commitment to a new payoff date. Many states do not permit payday loans to be renewed.
The similarities between the two loan options include speed and funding amounts. Consumers can gain access to the funds from either loan quickly. In addition, the total amount that people can borrow is about the same. Payday and installment loan amounts range from $150 to around $2,000. The total amount available depends upon the lender.
What are the Risks Associated with Installment and Payday Loans?
The main risk of taking out a short-term loan either under installment or payday terms is that they can be tough to pay back. In addition, loan officials often encourage borrowers to continue renewing their loans to maximize profits. Because those who turn to short-term loan companies for cash are frequently in a desperate financial situation, lenders are able to prey on them. In fact, a 2013 survey found that those facing dire situations were willing to accept loans with any kind of repayment terms.
Many people who take out these loans are unable to repay the money. This forces them into bankruptcy to escape the escalating loan costs. Lenders can take borrowers to court. If this happens, borrowers will be responsible for legal costs. Anyone who is considering taking out a short-term loan should review the repayment terms carefully.
When Borrowing Options Become Slim
People take out short-term loans when their borrowing options become slim. Traditional lenders are often unwilling to lend funds to those who have blemished credit histories or low annual incomes. Chief Executive Officer Daniel Feehan of Cash America said, “We do believe a substantial portion of our installment loan growth has been generated by new customers who are finding fewer and fewer affordable opportunities for consumer credit in the marketplace.” When it comes to installment loans versus payday loans, the best one provides the financial help that a borrower needs at the time. To read more about the best types of short-term loans, visit the PersonalMoneyStore.com.