There has been a lot of talk about the risk of payday loans lately, following a new report from the Consumer Financial Protection Bureau that calls them a “long-term and costly debt burden.” But there’s another fast-growing category of small, short-term loans aimed primarily at low-income Americans – and unbanked people in particular – that can be just as dangerous. ProPublica and Marketplace have teamed up for a in-depth look installment loans, and uncovered a dark side of what an industry spokesperson called “the safest form of consumer credit there is.”
Consumer advocates say installment loans may be a better option than payday loans because they don’t have a final lump sum payment that can push the borrower even deeper into debt. Lenders also report to credit bureaus, so making on-time payments can help someone with a checkered credit history improve their reputation.
But these aren’t necessarily safe products, says Lauren Saunders, chief lawyer at the National Consumer Law Center. “Some installment loans have outrageous rates, additional fees and deceptive products, loan reversals and other tricks that can be just as dangerous, and sometimes more, because loan amounts are usually higher.”
Like payday loans, installment loans don’t look like they involve a lot of money. On its website, installment lender World Acceptance Corp. says, “The average gross loan worldwide in fiscal 2012 was $ 1,180, and the average contractual maturity was approximately twelve months. “
A woman interviewed by ProPublica took out a loan of $ 207 to have her car repaired, agreeing to make seven monthly payments of $ 50 to pay it off, for a total of $ 350.
In an age when credit card interest rates are on average in the mid-teens, that’s a huge profit margin. But this is really only the beginning of what makes these loans risky, especially for the financially vulnerable people who are the main customers for these products.
These are not “one-time” fixes. These loans are presented as a simple and one-time solution to a lack of liquidity. In reality, they can be renewed just as payday loans are often rolled over into new loans.
And the companies that sell these loans are remarkably effective in keeping their customers coming back for more. According to global CEO Sandy McLean, 77% of the company’s lending volume is from existing loan renewals.
“They aggressively market their current customers to continually refinance,” says Chris Kukla, senior vice president of the Center for Responsible Lending.
In its report, ProPublica spoke to former installment loan officers who were trained to keep clients hooked longer. “Whenever they had money available, [the goal was] to get them renewed, because as soon as they do, you have another month where they only pay interest, ”said a former World employee.
APRs can exceed 500%. A One World client interviewed by ProPublica had a loan with an APR of 90% stated on the contract. As bad as it sounds, it doesn’t even scratch the surface of how much people pay, as a percentage, when they renew these loans over and over again.
The payments are structured so that you pay more interest up front. This means that serial refinancers continue to pay interest but do not make a big dent in the principal, which is no use for them to get out of debt. Kukla says the number of customers who find virtually all of their installment loan debt from disposable income service contradicts the industry’s claim that these products are affordable.
ProPublica interviewed a client who had two installment loans, both over ten years old, and calculated that she was paying an effective APR of over 800% on that debt.
Expensive “insurance” accumulates on more costs. Federal regulators recently cracked down on credit card companies that sell complementary products such as “credit protection” plans. But ProPublica says these life, disability or auto insurance policies are still aggressively sold to installment loan customers. “Every new person who has arrived, we have always touched and maximized with assurance,” a former employee said in the report. Most of the time, these products are optional, but customers are not made aware of this.
They grow up. An indirect result of the CFPB’s emphasis on payday loans is that lenders are redirecting more of their resources to installment loans.
Cash America International CEO Daniel Feehan, for example, told investors on the company’s quarterly conference call last month that the company was trying to stay out of the sights of regulators by selling more loans to installment and less payday loans. “We are trying to balance good consumer demand with what regulators and consumer groups complain about,” he said.
When it comes to federal regulation, these lenders apparently believe that installment loans have dodged a regulatory bullet. For now, at least, they’re probably right. “I don’t think the installment lending industry is really a high priority right now… World’s McLean told investors on the company’s quarterly conference call last month.