There’s been a lot of chatter about the risk of payday loans lately, prompted by a new report from the Consumer Financial Protection Bureau that called them “a long-term, expensive debt burden.” But there’s another, fast-growing category of small, short-term loans pitched mostly to low-income Americans — and the unbanked in particular — that can be just as dangerous. ProPublica and Marketplace teamed up for an in-depth look at installment loans, and uncovered a dark side to what an industry spokesman termed “the safest form of consumer credit out there.”
Consumer advocates say installment loans can be a better option than payday loans because they don’t have a final balloon payment that can push the borrower even deeper into debt. Lenders also report to credit bureaus, so on-time payments can help someone with a checkered credit history to improve their standing.
But they’re not necessarily safe products, says Lauren Saunders, managing attorney at the National Consumer Law Center. “Some installment loans have exorbitant rates, deceptive add-on fees and products, loan flipping, and other tricks that can be just as dangerous, and sometimes more so, as the loan amounts are typically higher.”
Like payday loans, installment loans don’t start off sounding like they involve a whole lot of money. On its website, installment lender World Acceptance Corp., says, “World’s average gross loan made in fiscal 2012 was $1,180, and the average contractual maturity was approximately twelve months.”
One woman interviewed by ProPublica took out a loan for $207 to get her car repaired, agreeing to make seven $50 monthly installments to repay it — for a total of $350.
At a time when credit card interest rates average in the mid teens, that’s a huge markup. But that’s really just the start of what makes these loans risky, especially for the financially vulnerable people who make up the core customer base for these products.
They’re not “one time” fixes. These loans are pitched as a simple, one-time solution to a cash crunch. 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 at getting their customers to come back for more. According to World CEO Sandy McLean, 77% of the company’s loan volume is renewals of existing loans.
“They aggressively market their current customers to contiually refinance,” says Chris Kukla, senior vice president at Center for Responsible Lending.
In its report, ProPublica talked to former installment loan officers who were trained to keep customers on the hook for a longer time. “Every single time they had money available, [the goal was] to get them to renew, because as soon as they do, you’ve got another month where they’re just paying interest,” one former World employee said.
APRs can top 500%. One World customer interviewed by ProPublica had a loan with an APR of 90% listed on the contract. As bad as that sounds, it doesn’t even scratch the surface of how much people pay, percentage-wise, when they renew these loans over and over.
The payments are structured so you pay more in interest early on. This means that serial refinancers keep paying interest but don’t put much of a dent in the principal — which does them no good as far as actually getting out of debt. Kukla says the number of customers who find virtually all their disposable income servicing installment loan debt belies the industry’s claim that these products are affordable.
ProPublica interviewed one customer who had two installment loans, both more than a decade old, and calculated that she was paying an effective APR of more than 800% on that debt.
Pricey “insurance” piles on more fees. Federal regulators have recently cracked down on credit card companies selling add-on products like “credit protection” plans. But ProPublica says these policies for life, disability, or car insurance are still aggressively sold to installment loan customers. “Every new person who came in, we always hit and maximized with the insurance,” one former employee said in the report. Most of the time these products are optional, but customers aren’t told that.
They’re growing. An indirect result of the CFPB’s focus on payday lending is that lenders are shifting more of their resources towards 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 regulators’ cross hairs by selling more installment loans and fewer payday loans. “We’re trying to balance the right consumer demand against what the regulators and consumer groups are complaining about,” he said.
When it comes to federal regulation, these lenders apparently believe installment loans have dodged a regulatory bullet. For the time being, at least, they’re probably right. “I do not believe at this point in time that the installment lending industry is a real high priority… it does not appear at this point in time that the Consumer Financial Protection Bureau’s goal is to eliminate credit to this large segment of the population,” World’s McLean told investors on the company’s quarterly conference call last month.