In June 2016, the Consumer Financial Protection Bureau released its proposed regulations for installment loans for bad credit borrowers. Although most of the attention has focused on the new rules for payday loans, the CFPB is also proposing new regulations for most installment loans for those with bad credit with an annual percentage rate of more than 36 percent, which includes any fees or additional charges.
Despite the fact that installment loans for bad credit are a less expensive and safer alternative to payday loans, the CFPB and other critics seem determined to deny millions of people access to bad credit installment loans. Critics of these types of loans have adopted a patronizing attitude toward borrowers that is even more demeaning when one considers that few of these critics crying for more regulation have ever needed a small-dollar, short-term loan.
Patronization of Installment Loans for Bad Credit Borrowers by Those Who Never Needed One
It is interesting to note that the criticism does not extend to all types of installment loans – just for those with bad credit. Apparently, it is fine to finance a new car or secure a mortgage on a home, and little attention has been given to whether these borrowers can afford to make their payments. Not much attention has been given to over-extended borrowers who amass huge credit card bills or who must monitor their open balances to see whether they can afford to charge their weekly groceries. Instead, the bulk of the criticism has been leveled on the credit products commonly used by people who lack access to traditional sources of credit. These bad credit borrowers are more likely to need an installment loan to deal with a financial emergency.
The CFPB made its intentions regarding payday loans amply clear in 2015 and hinted at possible actions much sooner. In response, many payday lenders began offering installment loans for bad credit instead of or along with the traditional payday loan. Many critics viewed the transition as attempts by payday lenders to find legal loopholes that would allow them to continue making high-cost loans. A report issued in 2015 by the National Consumer Law Center refers to the installment loans as a “new wave of predatory lending.”
However, the NCLC’s own data reveals that the interest rates for installment loans are significantly more economical than the fees for payday loans. Depending on the state and the length of the loan, the total interest can be less than 36 percent. For example, in 20 states, a $500 installment loan with a term of six months will carry an APR of less than 36 percent, including origination fees or other charges, and in 13 other states, the full APR ranges from 36 percent to 60 percent. Although these rates may seem high, they are substantially lower than the APR on a payday loan for the same amount.
The new regulations, however, could make it impossible for lenders to offer installment loans. As reported by Consumer Financial Services Review, lenders will be given new responsibilities that will increase their operating expenses. Lenders making installment loans will need to verify that the borrower can afford the loan payments as well as meet their other financial obligations. If the borrower has paid off a short-term loan within the last 30 days, lenders must verify that his financial situation shows significant improvement. If the lender has an annual default rate of less than 5 percent per year, it may be possible to waive the requirement to determine the borrower’s ability to repay the loan if the loan has a total cost of less than 36 percent plus a small origination fee.
The new regulations are so onerous that traditional lenders have warned that they will be affected. In June 2016, the Independent Community Bankers of America and the Credit Union National Association sent a joint letter to the CFPB, stating that the proposed rule “would unquestioningly disrupt lending” by community banks and credit unions. The letter stated that the compliance burdens would eliminate or curtail existing products as well as eliminate incentives to develop new products to meet the demand for small-dollar, short-term loans.
Consumers want these types of loans, and credit unions, community banks and private lenders want to offer them. It seems that the only ones who are against bad credit installment loans are well-heeled political appointees and politicians who are out of touch with the realities that millions of their constituents face on a daily basis. The paternalistic attitude that borrowers need to be protected from themselves is patronizing, insulting and will cause more harm than good.
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In modern America, having access to credit is important. Used wisely, credit can improve a family’s standard of living, make it possible to deal with a financial shortfall before it turns into a disaster and smooth out the rough periods that virtually everyone will encounter sooner or later. For many people, installment loans for bad credit are an affordable credit tool and the best solution to a temporary financial problem. If you would like to learn more about installment loans and other credit products, visit Personal Money Store to read the many informative articles that are available.