WASHINGTON—Major weaknesses in state laws have led to practices that obscure the true cost of small installment loans, discourage safer lending, and harm customers, according to a new report from The Pew Charitable Trusts, “State Laws Put Installment Loan Borrowers at Risk.”
Approximately 10 million Americans use installment loans annually, spending more than $10 billion on fees and interest to borrow amounts ranging from $100 to more than $10,000. The loans are issued at roughly 14,000 stores in 44 states by consumer finance companies, which differ from lenders that issue payday and auto title loans, and have much lower prices than those products. Loans are repaid in four to 60 monthly installments that are usually affordable for borrowers.
This segment of the small credit market had not been well-studied until now, and Pew’s report notes that the pricing, affordability, and structure of installment loans are more consumer-friendly than those of other subprime credit products, such as payday and auto title loans. However, the study also finds that state regulatory frameworks enable and often encourage three practices detrimental to consumers: front-loaded fees, stated annual percentage rates that do not reflect the total costs of the loans plus ancillary products, and the selling of credit insurance and other low-value products with upfront premiums.
“Many state laws lead to unsafe lending practices that put borrowers at unnecessary financial risk,” said Nick Bourke, director of Pew’s consumer finance project. “With sensible safeguards, installment loans can be better alternatives to payday and other high-cost loans for borrowers with low credit scores.”
Pew recommends that lenders, legislators, and regulators improve outcomes for consumers who use installment loans by:
These improvements to state laws would allow installment loans to evolve into safer, more affordable alternatives to other nonbank credit and to better serve customers who have few good options today.
The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at pewtrusts.org.