Alternative Finances

Will Installment Loans Replace Payday Loans?

Payday loans and installment loans have a lot in common.  Both tend to be pitched at borrowers with FICO scores that lock them out of more traditional means of credit acquisition like cards or personal bank loans, both tend to come with big interest payments and both aren't for terribly large sums of money (a few hundred for payday loans, a few hundred to a few thousand for installment loans).  Both can come with staggeringly high APR's - in many cases in excess of 200 percent of the original loan.

But two main differences separate them.

The first is time - payday loans tend to require a large balloon payment at the end of the loan term - which is generally a week or two long (since the loans are repaid, in full, on payday as their name implies).  The second is regulatory attitude.  The CFPB doesn't like payday lending, thinks those balloon payments are predatory and is working hard to regulate those loans heavily (some say so heavily they won't exist anymore).

Installment lending, on the other hand, looks like the alternative the regulators favor.

So lenders have been switching gears. In 2015, short-term lenders sent out $24.2 billion in installment loans to borrowers with credit scores of 660.  That is a 78 percent uptick from 2014, and a triple up on 2012, according to non-bank lending data from Experian.

And that sort of increase has drawn the attention of the CFPB - which is currently in the midst of a battle to get payday lending regulations passed. In addition to that effort, the agency has also launched an inquiry into certain high-cost installment loans that fall outside the scope of the current rule making process.

Specifically the CFPB is looking for “potential evolution in these markets” that could harm consumers, said spokesman Sam Gilford.

Advocacy groups have also started taking a closer look at installment loans -  the National Consumer Law Center argues that installment firms are actually more dangerous than their payday counterparts because they normalize carrying debt for at-risk customers.  They also point to high interest rates - and the fact that the firms are set to profit even if their customers default.

Installment lenders note that they send money out to high risk borrowers - which means the interest rate is higher to offset the risk and also that they would have to design their business model to handle borrower default because the thing that makes high risk borrowers high risk is that they have a higher likelihood of defaulting (hence the high interest rate).

Moreover, at least some installment lenders argue that normalizing debt - and repaying it - isn't bad for consumers, it's good for them - especially if they want to move into the lower interest regular credit markets controlled by banks.

High cost installment loans have been increasing on the landscape as payday lending has increasingly drawn scrutiny and regulation.

“We saw the regulatory writing on the wall,” said Ken Rees, Think Finance’s former chief executive who now runs Elevate - a large online installment lender.






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