Installment loan lenders thrive where payday lenders used toMany states have tried to eliminate payday loan lenders, but it hasn’t eliminated the need for credit from non-bank sources. Some states have new installment loans stores where payday loan stores once existed as other forms of short term credit fill the void.
Virginians frequenting pawn shops and title lenders more
Many states have passed laws intended to closely regulate, if not outright eliminate, payday loan lending. However, such laws don’t eliminate the need or demand for a short term credit product. The state of Virginia passed laws several years ago capping the interest rate on payday loans, which has reduced use of that particular product but not demand for financial help. Up to 10 percent of all Virginia households were estimated to have used some sort of alternative financial service, according to BusinessWeek, in a recent study done by the University of Virginia. Four percent of Virginians reported using payday loans at some point and 3 percent frequent pawn shops. Between 2004 and 2008, 70,000 Virginian households used refund anticipation loans and between 2005 and 2009, almost 150,000 Virginians used car title loans.
New class of lenders
Some of the most frequent laws passed against payday lending mandate loan repayment be done over a period of more than two weeks. The state of Colorado passed a law a year ago making the repayment period six months instead of a couple of weeks, according to the Greeley Gazette. As a result, former payday loan lenders are offering six month installment loans. When Arizona let the law allowing payday lenders to lapse in 2010, many thought that payday lending would disappear. Instead, according to the Arizona Republic, many stores simply started offering car title loans instead. In February of this year, a bill was introduced to the Arizona legislature that would authorize installment loans at higher-than-normal interest, as many consumers still need a source of short term credit. North Carolina, according to BusinessWeek, just approved a bill authorizing installment loan lenders to charge more than 36 percent interest on loans up to $1,500.
Supply and demand still rule
Though there are many products that a lot of people find less than palatable, such as payday loans, there is obviously still a demand for these products. A lot of people who don’t have access to bank credit find themselves short in between paydays or have an emergency come up that they didn’t plan for. Then they have to seek out alternative financial service providers in order to get the credit they need. Because many of these lenders don’t benefit from the kind of protections banks enjoy, they have to charge higher interest rates in order to stay open. It is undeniable that there is a demand for these types of short term credit.
BusinessWeek on VA
Arizona Republic on payday loans leaving
Arizona Republic on new loan bill
BusinessWeek on North Carolina