Pew Report: State Laws Put Installment Loan Borrowers at Risk
WASHINGTON – Major weaknesses in state laws have led to practices that mask the true cost of small installment loans, discourage safer lending and hurt clients, according to a new report from The Pew Charitable Trusts, the state puts installment borrowers at risk. “
About 10 million Americans use installment loans each year, spending over $ 10 billion in fees and interest to borrow amounts ranging from $ 100 to over $ 10,000. The loans are issued in approximately 14,000 stores in 44 states by consumer credit companies, which differ from lenders who provide payday loans and auto title loans, and are priced much lower than these products. The loans are repaid in four to 60 monthly installments which are generally affordable for the borrowers.
This segment of the small credit market has not been well studied until now, and the Pew report notes that the price, affordability and structure of installment loans are more user-friendly than those of other credit products. at risk, such as breakdown assistance and automobile title. ready. However, the study also finds that state regulatory frameworks often allow and encourage three harmful consumer practices: entry fees, reported annual percentage rates that do not reflect the total cost of loans plus ancillary products, and the sale of credit insurance and other low value products with upfront premiums.
“Many state laws lead to unsafe lending practices that expose borrowers to unnecessary financial risk,” said Nick Bourke, director of Pew’s consumer finance project. “With reasonable collateral, installment loans can be better alternatives to payday loans and other high-cost loans for borrowers with low credit scores. “
Pew recommends that lenders, lawmakers and regulators improve outcomes for consumers who use installment loans by:
- Spread the costs evenly over the life of the loan. The origination or acquisition costs should be nominal, proportional to the amount financed and repayable on a pro rata basis in order to minimize the incentives for lenders to refinance loans and to avoid harming borrowers.
- Require credit insurance to work like other standard insurance policies, with typical loss rates and monthly premiums rather than premiums billed and funded.
- Require that the sale of ancillary products be separate from the issuance of credit. Credit insurance and non-loan products should only be offered after a loan transaction has been completed and the borrower has received the product or has been notified that the loan has been approved.
- Set or continue to set maximum allowable costs that are transparent, fair to borrowers and sustainable to lenders. If policymakers want small installment loans to be available and safe for consumers, they should allow interest rates high enough to allow efficient lenders to operate profitably and ban ancillary products rather than set prices. lower rates and then allow lenders to sell ancillary products to increase their bottom lines. Existing research is mixed on the overall impact of small credit on the well-being of consumers, so policymakers may, as those in some states have already done, effectively prohibit small credit by setting limits. low rates and prohibiting fees and ancillary products.
These improvements in state laws would allow installment loans to become safer and more affordable alternatives to other non-bank loans and to better serve clients who have few good options today.
Pew Charitable Trusts are driven by the power of knowledge to solve today’s toughest problems. Learn more about pewtrusts.org.