Payday loans are for consumers with no credit or low credit rating. These high-yield loans promise quick cash until the next paycheck arrives, but they often create dangerous cycles of new loans to pay off old ones, run out of finance, and drive borrowers into increasing poverty. Consumers today enjoy some protection against this type of theft through payroll, vehicle title and some expensive installment loans from the Office of Financial Consumer Protection. However, an alternative form of credit, known as installment credit, tacitly evolves into a less regulated alternative to payday loans.
What are installment loans?
Installment loans are part of a non-bank consumer credit market, which means they come from a consumer finance company rather than a bank. These loans are generally offered to low-income consumers whose credit scores are low and who cannot qualify for traditional bank loans. Installment loans range from $100 to $10,000. These loans and can be secured, which means that the borrower offers collateral or guarantees.
They are similar to payday loans in that they are intended for short-term use and are aimed at people with low incomes or people with low credit scores. However, the two types of loans differ considerably in their lending methods.
Pew Charitable Trusts, an independent not-for-profit organization, analyzed 296 installment loan contracts from 14 of the largest installment lenders. Pew discovered that these loans can be a cheaper and safer alternative to payday loans. Monthly payments are cheaper and easier to manage. According to Pew, installments represent 5% or less of the borrower’s monthly income. This is positive when you consider that payday loans often absorb large portions of the paycheck.
Applying for an installment loan is cheaper than a payday loan. A 2013 study by the Office of Consumer Financial Protection found that the average interest rate on a typical 14-day loan is $15 per $100. However, according to Pew, installment loans are much cheaper.
These loans can be mutually beneficial for the borrower and the lender. According to the Pew report, borrowers can repay the debt in a “reasonable time and at a reasonable cost” without affecting the lender’s income.
Problems With Short Term Loans
If payday loans provide money to almost 12 million needy Americans and 11% of undocumented Americans make loans, how can this be bad? The answer is complicated. Payday loans give lenders direct access to checking accounts. When payments are due, the lender automatically deducts the payment from the borrower’s account. However, if an account balance is too small to cover the withdrawal, consumers will be charged overdraft fees from their bank and additional charges from the payday lender.
Getting a payday loan is easy, which is why many of them enter the field of robbery loans. Borrowers are only required to provide identification, employment verification, and account verification information. Payday lenders do not check credit scores, which means that they are too often given to people who cannot afford them.
People who are running out of money all the time can get into a cycle of payday loans. For example, a woman in Texas repaid a total of $1,700 on a $490 loan from ExpressCash. It was his third loan taken out this year, according to Star-Telegram.
Original loans are often transferred to new, larger loans at the same fee schedule. And this is where borrowers get in trouble because of the high-interest rates and fees.
