Will installment loans replace payday loans?
Payday loans and installment loans have a lot in common. Both tend to be presented to borrowers with FICO scores that prevent them from accessing more traditional means of acquiring credit like cards or personal bank loans, both tend to incur large interest payments and both are not for very large sums of money (a few hundred for payday loans, a few hundred to a few thousand for installment loans). Both can come with incredibly high APRs – in many cases over 200% of the original loan.
But two main differences separate them.
The first is time – payday loans tend to require a large lump sum payment at the end of the loan term – which usually lasts a week or two (since loans are repaid in full on payday, like their name suggests). The second is the regulatory attitude. The CFPB dislikes payday loans, thinks these lump sum payments are predatory, and works hard to heavily regulate these loans (some say so heavily they won’t exist anymore).
The installment loan, on the other hand, looks like the preferred alternative by regulators.
So lenders have shifted gears. In 2015, short-term lenders sent $24.2 billion in installment loans to borrowers with credit scores of 660. This represents a 78% increase from 2014 and a triple from 2012, according to Experian’s non-bank lending data.
And that kind of increase has caught the attention of the CFPB – which is currently in the midst of a battle to pass payday loan regulations. In addition to this effort, the agency has also launched an investigation into certain high-cost installment loans that fall outside the scope of the current rule-making process.
Specifically, the CFPB is looking for “potential developments in these markets” that could harm consumers, spokesman Sam Gilford said.
Advocacy groups have also started to take a closer look at installment loans – the National Center for Consumer Law says installment businesses are actually more dangerous than their payday counterparts because they normalize people’s indebtedness. at-risk customers. They also point to high interest rates – and the fact that companies are poised to make a profit even if their customers default.
Installment lenders note that they send money to high-risk borrowers – meaning the interest rate is higher to compensate for the risk and they should also design their business model to handle the default of the borrower, because what makes high-risk borrowers high-risk is that they have a higher probability of default (hence the high interest rate).
Moreover, at least some installment lenders argue that normalizing debt – and paying it off – isn’t bad for consumers, it’s good for them – especially if they want to enter regular credit markets at low interest rates controlled by banks.
High cost installment loans have risen in the landscape as payday loans have come under increasing scrutiny and regulation.
“We’ve seen the regulatory writing on the wall,” said Ken Rees, a former managing director at Think Finance who now runs Elevate – a major online installment lender.