Use of Installment Loans Skyrockets – Here’s Why
The category of installment loans covers a wide variety of both secured and unsecured loans. Secured installment loans are those that require the borrower to pledge collateral; financing a car or taking out a mortgage are examples of secured installment loans. Unsecured installment loans include personal loans, student loans and signature loans, and these loans do not require collateral. In recent months, the use of unsecured installment loans has been increasing substantially.
Reasons for Skyrocketing Use of Installment Loans
The reasons for the dramatic increase in installment loans are varied. Much of the surge is due to pending regulations proposed by the Consumer Financial Protection Bureau that will make it more difficult for lenders to offer payday loans. As a result, many payday lenders are switching to installment loans instead of the traditional payday loans that were once the primary product that they offered.
Furthermore, as consumers increase their understanding of personal finance, many are realizing that it is more practical to budget for a fixed monthly payment than it is to try to save up for a lump-sum payment. Many borrowers can also qualify for a larger loan with an installment loan than they can with a payday loan.
Since payday lenders typically do not report cash advance loans to the credit bureaus, these loans do not help borrowers improve their credit scores. Borrowers who want to establish or improve their credit history often prefer an installment loan from a lender who will report to the credit bureaus. In addition, installment loans typically have a much lower annual percentage rate than payday loans.
How Much Are Installment Loans Increasing?
Recent statistics have not yet been released that encompass the entire nation. However, the California Department of Business Oversight recently released a report on installment loan activity within the state. The report stated that there was a 48.7-percent increase in the total dollar amount of consumer installment loans made by lenders other than banks during 2015. For loans of less than $2,500, the increase was approximately 30 percent; approximately 18.5 percent of the increase involved loans of more than $2,500. The combined principal of all consumer installment loans made in 2015 by lenders other than banks exceeded $34 billion.
What Qualifies as an Unsecured Installment Loan?
As defined by Credit.com, an installment loan is an agreement in which the borrower receives a specific amount of money that is to be repaid in installments. Borrowers agree to repay the principal and interest in a series of monthly payments that are roughly the same amount every month. For example, a borrower might receive a loan of $300, and the repayment plan might be six monthly payments of $71 each and a final payment of $69. If the borrower does not pledge his car title, home or other collateral, the loan is said to be unsecured.
Installment loans are not revolving lines of credit. With a credit card, for example, the borrower has a specific credit limit, and once that limit is reached, he cannot make additional charges. As he makes payments on the balance, however, he can make additional charges. Credit cards are a type of revolving credit. With an installment loan, if the borrower needs additional funds, he must refinance his existing loan or secure another loan.
Do Lenders Require Good Credit for Installment Loans?
Every lender has a policy for approving applications for installment loans. To borrow from a bank, borrowers often need to have a credit score in the 600 to 650 range. However, there are many lenders who will make installment loans to borrowers with bad or no credit. These lenders rely more on their evaluation of a borrower’s ability to make the monthly payments. They often look at factors such as income, employment history and the borrower’s debt-to-income ratio when making a decision.
Pending CFPB Regulations Regarding Installment Loans
The Consumer Financial Protection Bureau, also known as the CFPB, is an independent federal agency that was established in the aftermath of the financial crisis of 2008. The primary function of the CFPB is to protect consumers from unfair or abusive practices related to financial transactions. Payday lenders have been high on the CFPB’s list of priorities since the agency was created.
Many of the proposed regulations target payday lenders specifically, and opponents of the regulations fear that a large number of payday lenders will be unable to continue to make payday loans under the new requirements. However, the new regulations also address installment loans. As reported by the Consumer Financial Services Review, the proposed regulations for installment loans are complicated. In most cases, however, lenders will be required to document the borrower’s ability to repay, and lenders may not be able to make an installment loan to a borrower unless at least 30 days have elapsed since the borrower repaid an installment loan or payday loan.
Is an Installment Loan the Answer to Temporary Financial Problems?
Installment loans can be a valuable financial tool for many people. However, like any credit product, borrowers should make sure that they will be able to make monthly payments on time without sacrificing necessities or paying other bills late. You can learn more about installment loans and other credit issues by visiting the Personal Money Store.