Installment Loans – Ugly, but Necessary

When traditional lenders decided to put the kibosh on approving funds for people with imperfect credit histories, they forced those in need of emergency cash to look elsewhere for money. Because of this, installment loans are ugly but necessary.

People Use Installment Loans When Borrowing Options are Slim

Payday loan lending got its start in the 1980s. The industry enjoyed almost 40 years of virtually unregulated bliss before legislators at both the state and federal level decided to crack down on its practices of charging high interest rates and fees. With regulations now in place for payday loans, short-term loan lenders are shifting into financing installment loans. This transition ensures that those with a lack of borrowing options have a place to go when they need emergency cash.

Nerdwallet points out that in addition to gaining access to needed cash, these types of loans may improve a person’s credit report. Installment loans are paid back through regular payments over a period of time that ranges from a few months to a little more than a year. This establishes a payment record. If the record shows that the borrower was on time with the installment payments, he or she will likely see a higher credit score.

Borrowers should keep in mind that their FICO score is calculated according to several factors. These include payment history, total amount of debt owed, number of credit years reported, new credit and types of credit issued. A person’s payment history accounts for 35 percent of the score while the total amount owed is 30 percent of the rating. The length of a person’s credit history accounts for 15 percent and new credit as well as types of credit are each 10 percent of the score.

The Good Side of Installment Loans

Time reports that an unintended consequence of added regulations against the payday loan industry is the rise of installment loans. These loans help people who are unable to borrow cash from traditional financial institutions. In addition, lenders who offer installment loans are required to make sure that a person who is requesting a loan is able to repay it. Because of this, installment loan lenders assess a borrower’s income and credit history. Upon loan approval, the lender will establish a repayment plan that includes affordable monthly payments and a defined payoff date. Daniel Feehan, CEO of Cash America International, said, “We’re trying to balance the right consumer demand against what the regulators and consumer groups are complaining about.”

Now, the Ugly Side of Installment Loans

While many installment loans offer fair terms, others are not good for consumers. The managing attorney for the National Consumer Law Center, Lauren Saunders, said, “Some installment loans have exorbitant rates, deceptive add-on fees and pricey products making them just as dangerous, and sometimes more so than payday loans as the loan amounts are typically higher.” In some cases, annual percentage rates may total more than 500 percent.

Installment loans are usually structured like mortgages so that the borrower pays more in interest at the start of the loan. If the person winds up extending the payoff period, then he or she will continue to pay interest without touching the principal amount. This arrangement doesn’t help people get out of debt. Also, some lenders increase their profits by selling expensive insurance products. The extra insurance is usually optional, but often, the lender’s staff fails to convey this information to the customer.

Borrowers with no or poor credit histories face more risk when it comes to installment loans online because their privacy may be in jeopardy. These borrowers are also more likely to come across people who will attempt to trick them out of their personal information or money. Some sites are set up to fish for contact information, so they can sell it to marketing companies for advertising purposes.

What About Regulation?

For now, federal regulators are focusing their legislative efforts on payday loans. Because of this, installment loans remain an available option for desperate borrowers. Sandy Mclean, the CEO of World Acceptance Corp, said, “I do not believe at this point in time that the installment lending industry is a real high priority. It does not appear that the Consumer Financial Protection Bureau’s goal is to eliminate credit to this large segment of the population.”

Desperate Times Call for Desperate Measures

An urgent need for cash combined with few borrowing choices make installment loans unavoidable. For many people, the availability of these loans provide the financial relief that they need. Unfortunately, the high fees turn them into an ugly borrowing option. To read more about installment loans, visit the