Dangerous, high-cost lending isn’t going away anytime soon.
While some have heralded the Consumer Financial Protection Bureau’s long-awaited payday-lending regulations as significant progress toward the end of predatory lending practices, other, similar products have, as predicted, started to take their place.
One of the biggest criticisms of the traditional payday-loan structure was that it required a large, lump-sum payment of principal plus interest. If—or more often, when—borrowers were unable to find the cash to pay back their very short-term loans with interest that reached the triple digits, these loans would be rolled into yet another short-term, lump-sum loan. And so the cycle went.
An uptick in what are called installment loans is the payday industry’s answer to that criticism—or, more precisely, the regulations that that criticism led to. Instead of making a lump-sum payment, installment-loan borrowers take out loans that are paid off a bit at a time, over a longer period of time. Installment loans are nothing new, and the same lenders who once predominantly peddled payday loans have been trying their hand at installment loans for some time, too. But now, they may try to make them a significantly larger share of their business. The Wall Street Journal recently reported that in 2015, lenders provided nearly $25 billion in installment loans to people with credit scores below 600. That’s 78 percent higher than the year before.