When installment loans online are applied for by borrowers, they have plenty of options, but all come with high interest rates. While payday and title loans get a lot of negative attention for charging borrowers high fees, another type of loan has been flying under the media radar, and it’s one with interest rates that are just as high. This overlooked loan option is the installment loan.
Plenty of Installment Loans Online, but They’re Pricey
Installment loans online are a fast-growing category of short-term loans that lenders are aggressively pitching to low income Americans. These loans can be every bit as dangerous to credit strapped borrowers as payday loans. They are also as expensive. While an industry spokesperson called them “the safest form of consumer credit out there,” a number of financial experts believe that they have a dark side.
According to Time, consumer advocates claim that installment loans are a better choice for borrowers than payday loans. They make this claim because installment loans don’t have balloon payments like payday loans do. These balloon payments often force borrowers deeper into debt. Installment loan lenders also report a borrower’s payment history to the major credit bureaus. Since they do, an installment loan borrower has the opportunity to improve or build his or her credit history.
Lauren Saunders, the National Consumer Law Center’s managing attorney, said, “Installment loans are not necessarily safe products. Some have exorbitant rates, deceptive add-on fees and products. Lenders may engage in loan flipping and other tricks that can be just as dangerous as payday loans, and sometimes, more so as the loan amounts are typically higher.”
Are Installment Loans Online Deceptively Advertised?
Like payday loans, installment loans seem like an affordable borrowing option on the surface. For instance, a borrower who takes out a $200 installment loan may agree to repayment terms that involve $50 monthly payments for seven months to repay the loan and the incurred fees. The total amount that the borrower winds up paying is $350. This seems reasonable, but since most credit card companies charge interest rates that average in the mid-teens, the $150 additional amount that an installment loan lender charges for a $200 loan is a huge markup. For the financially vulnerable, installment loans online are particularly risky because they are rarely a one-time transaction.
Proposed as a One-Time Solution
GreenPath reports that installment loan lenders earn a profit by adding on unneeded insurance fees and by tempting borrowers to renew their loans after proposing them as a one and done type solution. Installment loans online are frequently rolled over into new loans. Lenders that sell these types of loans are adept at luring customers back for another round. Statistics show that the main loan volume of many installment loan companies consists of renewed loans.
Annual Percentage Rates that Top 500 Percent
When it comes to installment loans online, people are paying exorbitant rates. Borrowers are paying these rates because they continue to renew their loans. With installment loans, the payment terms are structured so that borrowers pay more interest initially. This means that successive refinancers pay interest without putting a dent in the loan’s principal, so these borrowers remain in debt. Along with excessively high annual percentage rates, pricey insurance protection adds to a borrower’s principal balance.
Federal regulators have brought the hammer down on credit card companies that attempt to sell add-on insurance products like credit protection plans. However, these types of insurance policies are still sold to installment loan borrowers. A former employee of the industry said, “Every new person who came in, we always hit and maximized with the insurance. Most of the time these products are optional, but customers aren’t told that.”
An unforeseen consequence of the recent regulations against the payday lending industry is that these companies are transitioning into installment loan providers. They are making this change because it allows them to stay in business.
The High Cost of Emergency Funds
According to ProPublica, when lawmakers enacted regulations to block lending practices that carried excessively high interest rates and fees, installment loans were left out. Because of this, there are many installment loans available online, but they all come with high interest rates. When financial emergencies arise, installment loans online can be a funding lifeline, but for this to be a positive lending option, borrowers must do what they can to avoid rolling the loan over into another one. To learn more about installment loans and the high interest rates that come with them, visit the Personal Money Store.