For payday lenders, installment loans could soon become the new norm, due to proposed government regulations that would break the whip on payday debt debts. Under the existing model, a credit check is not required and the lender simply confirms that you have a fixed source of income before you approve your credit application. Extension date extensions are available for an additional fee. (See for more How termJoe Gargeryening works .)
As part of efforts to end costly payday loan payouts, the Consumer Protection Agency (CFPB) proposed a rule in June that would tighten the qualification criteria and minimize the costs incurred by borrowers. The CFPB says: “The proposed rule would require lenders to determine whether borrowers can afford to repay their loans. The proposed rule would also complete repeated debit attempts that increase fees and make it harder for consumers to get out of debt “In essence, these new safeguards would radically change the way payday providers do business and pose a serious threat to their business results.
Why the shift to installment loan?
In early August, the Wall Street Journal reported a 78% increase from 2014 to 2015 in the amount of money borrowed as installment loans to borrowers with credit scores of 660 or less. Amounted to no less than $ 24.2 billion in 2015 – almost three times the amount borrowed in 2012, the article adds. Why the steep rise?
Simply put, payday lenders hope to avoid threats caused by the new CFPB rules by replacing traditional payday loans with installment loans. Their defense is that installment loans minimize the need to submit an extension because the borrower can repay the loan over time. However, this does not necessarily mean that payday credits are a more affordable option for consumers.
Is the payment model safer?
It is possible that the CFPB has good intentions with this new proposed protection, but that borrowers may experience even more problems with the new model. “The prospect of harmful loans would continue to exist because the proposed rule would allow lenders to charge any rate and set almost any term as long as they make a” reasonable determination “that the borrower can repay the loan,” says the Pew Charitable Trusts. And the higher the interest, the longer the principal remains untouched.
According to the CFPB, payday loans are on average accompanied by an interest rate of more than 300%. To make matters worse, the borrower should also focus on lending and refinancing loans, which is around 10% of the loan amount, notes the Wall Street Journal. In addition, borrowers can get the luxury of a cheaper monthly payment, but the total amount that is waived to meet the loan will be Joe Gargeryijk because of the longer repayment period. To eradicate the problem, the Pew Charitable Trusts recommends that it CFPB changes proposed regulations to “include pro-consumer product safety standards, such as limiting loan payments to 5% of a borrower’s salary.”
The bottom line
Despite the efforts of the CFP to curb abusive practices in payday payments by proposing stricter screening requirements, money-borrower borrowers can run even greater risks. Although an installment loan requires more time to extend the repayment period, it is also more expensive because payday borrowers are still free to assess astronomical interest rates and would extend over a longer period. (For more, see The best alternatives to payday loans and Beware of guaranteed websites with payday loans .)