Regulatory action has caused a number of payday loan lenders to switch lending gears and offer long term installment loans. The change has come because loans with extended repayment terms have been largely ignored by policymakers. While this transition initially gave the appearance of making it more affordable for people to take out small dollar loans, it’s becoming clear that trouble exists for those who borrow them. When long term installment loans become long-term problems, borrowers suffer.
Long Term Installment Loans Often Result in Lasting Problems
Research has found that the conventional payday lending model is unmanageable for most borrowers. In fact, it often leads to added borrowing, which promotes long-term debt situations. This is causing the proliferation of installment loans. In fact, installment loan lending is widespread geographically. Today, payday and auto title lenders offer installment loans in 26 of the 39 states in which they operate.
While this has allowed the industry to remain profitable, it appears to be causing problems for borrowers. For instance, Pew Charitable Trusts confirms that installment loan lenders secure their product by requiring access to a borrower’s checking account for repayment. This allows them to collect their funds when they’re due, but it can leave borrowers short on cash for other important expenses.
Testing the Harmfulness or Lack Thereof of Installment Loans
A few years ago, the installment loan model was tested in Colorado, and the results of the test determined that the model’s repayment setup combined with reduced pricing limits was less harmful to borrowers than payday loans. The study inspired the state to pass legislation that required all payday loans to transition into installment loans with six-month repayment terms.
A national survey even found that most payday borrowers prefer loans that they can pay back in a few months. However, recent data shows that the earlier Colorado study may have been wrong because consumers seem to be having as much trouble paying off bad credit installment loans as they were payday loans.
High Interest Rates and Fees Cause Long Term Problems
Finder.com reports that long term installment loans online have exorbitant interest rates and excessively high fees. When annualized, the rates for these loans are often as much as 200 percent, and in some states, they are even as high as 400 percent.
In terms of dollars, these rates can really add up. For instance, if a person borrows $500 with repayment terms of 11 months at a 200 percent annual percentage rate, then they’ll wind up paying back around $850, which is a markup of $350.
While payday loans have been heavily scrutinized by regulatory agencies, these same officials have mainly left installment loans alone. They have done so because of the longer repayment terms. However, financial watchdog organizations and consumer protection agencies are on alert about installment loans, and they say that these lenders prey on desperate borrowers.
Unnecessary Insurance Plays a Role
According to ProPublica, installment loan lenders often push essentially useless insurance products. This increases the amount of the original loan, and while the insurance is sold under the guise of protecting the borrower, it’s really a safeguard for the lender. These products include life and disability insurance. When borrowers accept the added protection, the lender will receive money from the insurance company if the borrower should die or become ill.
Borrowers who take out loans for around $200 could wind up paying an additional $75 or more a month for insurance premiums. This is a type of rate cap workaround for lenders. A number of states limit the amount of interest that lenders can charge to 36 percent, so lenders use insurance premiums to increase their bottom line.
Will the Consumer Financial Protection Bureau Save the Day?
In June of 2016, the Consumer Financial Protection Bureau, or CFPB, presented rules designed to reign in the short-term loan industry and protect borrowers from a cycle of debt. The proposal features various safeguards such as confirming that those who borrow funds are able to repay them as well as limiting the number of times that a borrower can roll a loan over into a new one. If the regulations go into effect, it could save the day for borrowers.
Avoiding Long Term Problems from Long Term Installment Loans
When long term installment loans bring about never ending financial debt, borrowers are the ones who must make sacrifices. For instance, to pay back the debt, borrowers may put off a car repair or delay a visit to the doctor. They may even buy fewer groceries than they actually need to get by. Consumers can avoid these problems by focusing on ways to build up emergency funds and by making sure that their credit scores are high enough to qualify for traditional lending. To learn more about the long-term problems that come from long term installment loans, visit the Personal Money Store.