Installment Loans Gain Ground as Payday Loans Online Draw Fire

The payday loan industry has mastered the art of transformation. In the past, it’s done this by transitioning from operating out of classic storefronts to processing payday loans online as well as by offering title loans instead of traditional payday loans. With new federal restrictions on the horizon, the industry is finding that it needs to evolve again to survive. It’s doing so with loans that offer payday installment repayment terms. Because of this, installment loans are gaining ground as payday loans online draw fire from consumer advocates and government organizations.

Installment Loans Become More Popular as Payday Loans Online Face Criticism

With the Consumer Financial Protection Bureau, or CFPB, breathing down their necks, payday loan lenders are turning their attention to installment loans. The difference between loans that offer installment payments and payday loans is the payoff terms. Instead of requiring a borrower to repay the loan within a week or two, installment loans online are repayable over a few months.

CBS News reports that borrowers are more comfortable with these loans because of how they’re structured. The loan option also seems better due to the lengthier repayment terms. However, Pew has issued a warning to consumers that installment loans online come with many of the same traits as payday loans including excessively high interest rates and fees.

Finding New Ways to Skirt State Laws

According to The Wall Street Journal, in 2015, lenders handed out approximately $24 billion in installment loans to consumers who had credit scores of 660 or less. This figure grew by 78 percent from 2014, and it was almost triple 2012’s numbers. Payday and title loan lenders operate in 39 states, and in 26 of those states, lenders currently offer loans that feature installment repayment terms.

The industry has found ways to operate under the credit services organization statutes that exist in a few states. This lets lenders broker loans and charge fees for doing so. With these fees, payday lenders are able to skirt the interest rate caps that some states have in place.

Regulators Don’t Like the Payday Loan Industry reports that regulators have little regard for the payday loan industry. In particular, they don’t like that lenders put consumers on the hook for large balloon payments. The CFPB states that these arrangements are created to keep borrowers in a continuous cycle of renewals and high interest charges that result in unending debt.

Loans that fall under installment terms don’t feature balloon payments. Because of this, they’ve failed to capture the full attention of the CFPB so far. However, with payday lenders changing tactics, the regulatory agency may follow suit. Sam Gilford, a representative for the CFPB, confirmed that the agency is starting to look at the new products that traditional payday loan lenders are bringing to the market to determine whether they are offering lending options that could be harmful to consumers.

Are Borrowers of Online Installment Loans Likely to Default?

According to research commissioned by the CFPB, borrowers of payday loans online default on these loans within the first two years of taking them out about 50 percent of the time. The agency also found that about a third of those who take out a loan with installment terms wind up defaulting on them. The statistics would indicate that consumers are handling these types of loans better.

When it comes to payday loans online, the CFPB’s proposed regulations would require lenders to confirm that borrowers are capable of repaying the funds in addition to covering necessary expenses like mortgage payments and utility bills. This is a tough requirement for the industry to comply with since the repayment terms for these loans are usually within a week or two. Because of this, short-term loan lenders would struggle to prove that most borrowers have the means to repay the funds.

Should State and Federal Lawmakers Pass Additional Legislation?

State legislation and the CFPB’s proposed regulations against the payday loan industry are causing many of these lenders to switch to loans that consumers can pay off in installments. According to Pew, along with the new regulations, state and federal lawmakers should pass additional legislation to curb these loans because they feature excessive durations as well as unaffordable payments and noncompetitive pricing. To read more about the influx of online installment loans and how payday loans online are drawing fire, visit the Personal Money Store.