Providers of Online Installment Loans Face Continued Scrutiny
Online installment loans face increased scrutiny that also applies to payday lenders, banks, credit unions and alternative lenders such as Native American lenders who don’t necessarily have to follow state and federal regulations. The intention of the Dodd-Frank Act of 2010 and its creation of the Consumer Financial Protection Bureau was to protect families with lower incomes from being caught in debt traps, but hard economic realities tell a different story that’s worth considering before pointing fingers and implementing industry-wide reforms.
Intense Scrutiny of Installment Loans Online Reveals Misconceptions and Complicated Issues
The CFPB has put forward some comprehensive regulations to scale-back installment loans online, limit interest rates and protect consumers from what it perceives to be predatory lenders. Supported in its efforts by Democratic legislators and the outgoing Obama Administration, the CFPB formulated the “Small Dollar Lending Rule,” which proposes to end debt traps, eliminate repeated debit attempts that jack-up bank fees for overdrawing accounts and ensure that each borrower can afford to repay his or her loan obligation regardless of whether it’s short- or long-term.
According to Consumerfinance.gov, these rules are designed to protect consumers from usurious rates of payday loans, auto title loans and online installment loans. The rules would limit attempts to debit a borrower’s account to two transactions, set interest rate ceilings and require that lenders get credit reports even for short-term payday loans and small-dollar loan products, which would entail creating a new credit reporting agency to handle these smaller loans.
Another criticism of the short-term lending industry is its use of balloon payments that are due in full from each borrower’s next paycheck. The CFPB even recommends that most loan products be converted into installment loans that have smaller monthly payments. Unfortunately, the reason that payday lenders are able to offer short-term loans is because they can charge high interest rates for short periods, which most people can afford to pay. Long-term installments introduce increased uncertainties into the process. Borrowers won’t weigh their risks as carefully, which could lead to even higher default rates and reduce the profits of online installment loans, which must earn a reasonable profit to survive.
Critics of the CFPB and increased financial regulation of the installment loan industry–which include many Republicans and President-elect Donald Trump–feel that market forces are the best method of regulating interest rates, fostering competition and managing financial services. For example, a report from Valuewalk.com compares the costs of online loans with Apple computer products, which cost only $200 to produce but sell for nearly $700.
That’s about 350 percent times the manufacturing costs, which critics suggest is price-gouging on a colossal scale, but government officials don’t immediately call for regulations to restrict Apple’s free-market right to earn a profit. In fact, the pressure to own the latest electronic gizmo can be more a more powerful inducement to overspend for families with kids than any kind of loan debt trap. Even people with bad credit scrape, save and borrow to buy popular iPhones for their class-conscious kids.
CFPB Ignores Positive Testimonials and Other Facts About Installment Loans Online
Although many people–such as Democrats, consumer groups and political activists–praised the CFPB proposals for regulating installment loans online, others find the regulations politically self-serving, financially unsophisticated and based on mistaken assumptions. Studies show that most short-term lenders charge only about 15 percent, or $15, for each $100 that consumers borrow. That results in a 15-percent profit on the transaction as compared to a 350-percent profit when people buy an Apple device.
AF247.com reports that the CFPB’s complaint hotline receives thousands of positive testimonials about short-term loans as part of its “Tell Your Story” initiative, which the agency ignores in its policy-making efforts. Only a small percentage of the comments were about negative lending experiences of borrowing online. Highlights of the comments included the following observations:
- Less than 2 percent, or 240, of the reports were negative.
- Out of 12,546 comments, 12,308 of them praised the installment loan industry, payday lenders and other financial services.
- The complaints included those that were aimed at banks, insurance companies and student loan lenders.
- Only 74 of the 240 complaints directly related to payday lenders.
Installment Loan Industry Is Subject to Unfair, Inaccurate and Delayed Credit Reports
An additional report at Consumerfinance.gov, the government’s own website, reports that there have been sharp increases in credit reporting complaints that affect the installment loan industry. People with both bad and good credit complain about inaccuracies, mistaken-identity reports, debts that weren’t removed as required by law and other reporting offenses. Critics of online installment loans support creating a new credit reporting agency for short-term loans while ignoring the problems and power of existing reporting agencies.
Mortgages receive the highest volume of complaints at the CFPB, but little is being done on this front while people with bad credit and limited resources have their options further curtailed by oppressive regulations.
People with Bad Credit Depend on Fewer Financial Options than Those with Good-to-Excellent Credit
Targeting bad credit loans and other short-term lending products for increased regulations means that many companies could be forced out of business. While consumer advocacy groups welcome this result, people with bad credit lose one of their few options for dealing with a cash shortage. Everyone–even those with high incomes and excellent credit–can experience an occasional shortage of cash, and easy-to-obtain bad credit loans offer a simple and fast way to get money for any purpose. That’s the option that borrowers overwhelmingly support–their right to balance their needs and borrowing costs based on their own financial situations.
It’s true that some people won’t handle their credit responsibly, but that applies to auto loans, mortgages, credit cards, bank loans and any financial product. Many free market advocates feel that short-term lenders are unfairly targeted for increased regulations because their customers don’t defend their freedom of choice as aggressively as more sophisticated consumers. Regardless of loan or retail product, profit is profit. Some companies charge more than others based on what people are willing to pay. Loan products shouldn’t be different–consumers can always choose not to borrow if the interest rates are too high and unreasonable.
There are some troubling issues with online installment loans, and these include high default rates, predatory lenders who hide behind Native American tribes to avoid state and federal regulations and debt traps that all forms of credit can generate or exacerbate. However, fairness to lenders and support for free enterprise are major arguments against increased regulations. Many payday lenders–reeling from new regulations and the advertising ban that was imposed on payday loans by Google–have expanded into installment loans online. You can find out more about increased regulatory scrutiny of all financial products at the Personal Money Store.