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Because of scams payday loans are on the way out, but installment loans have taken their place

installment loanPayday loans usually have a very short period to repay – typically a lump sum payment in a few weeks. The interest rates are sometimes upwards of 700-800%.  Many times the borrower has to take out another loan to pay the original, and this goes on for years.  Regulators put payday loans on their radar and many investors are finding their way into prison or bankruptcy.  Fast forward to installment loans.  Currently borrowers without pristine credit owe approximately $50 billion in installment loans. 

Installment loans are a cash cow for creditors, but a devastating cost to borrowers,” said Margot Saunders, senior counsel for the National Consumer Law Center, a nonprofit advocacy group.

Payday loans under heavy scrutiny

installment loanFor the last several years there have been monthly articles and news stories about the horrific problems with payday loans.  As with all things legal, the problem started small and then grew.  One greedy, unscrupulous lender taught another, who taught another, etc.  Years past and the actions (just like bullies) get more and more outrageous, until everyone knows about the problem.  Eventually, the legal system sits up and pays attention.  Federal and state agencies, federal and state Attorney General’s, and others start to critically analyze the problem.  By the time these folks get involved the general public has suffered serious and crippling consequences (think of the gangs taking over your neighborhood).  Finally, years later, the power that be start to clamp down on the bad actors – lawsuits, fines & penalties, prison sentences, new laws come into being.

The payday lenders must find another way to to make their millions – enter installment loans.  The installment lenders (really the payday lenders by another name) very quickly these “hard money” lenders became so popular that the bulk of their revenue came from installment loans rather than payday loans.

Who is borrowing installment loans?

Installment loan borrowers (like payday borrowers) are usually people who are gambling that their financial situation will get better if only they can find a little more money.  Unlike payday loan borrowers (who have very poor credit), typically those borrowing installment loans don’t have terrible credit, but they also do not have great credit – so we are talking about ‘middle class America’.  According to data from Experian, 45% have annual income over $40,000, 15% between $50,000 to $60,000 and 13% over $60,000.

Interest rates in the triple digits

installment loanMany states have caps on interest rates, but may only apply to smaller loans (California and Virginia – loans below $2,500).  Until the legislation catches up with the current market there are few laws governing larger loans.  So, it is not unusual to see company companies charging interest between 34% and 155%

installment loan

MUSINGS FROM DIANE:

installment loanToo many times we respond to stress without thinking about the future consequences.  A co-worker does something rude and we lash out, resulting in a reprimand or perhaps losing our job.  We withhold rent because a landlord refuses to fix a problem, resulting in an eviction.  A homeowner’s association issues a fine for not cleaning up the front yard, resulting in assessments, attorneys fees and ultimately a foreclosure of our home.
In life, the most difficult planning has to do with finances.  We use the rent money to buy the latest phone or ignore that weird banging of our vehicle.  What happens?  We cannot pay the rent and are evicted; or our vehicle craps out, we lose our job because we cannot get to work.
One class missing from school – finances.  Unless your parents taught you how to handle money, then the only way you will learn is by trial and error.  Unfortunately, many errors can be serious.  Always do your homework before borrowing money.  Will your income be enough to cover the new debt?  If not, don’t borrow the money.  Instead, look for another option.

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Diane L. Drain

Diane L. Drain, bankruptcy attorney, retired law professor, mentor and community spokesperson.

About Diane Drain:

Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.

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