Unfortunately, not all state laws work in your favor when taking out installment loans. There are so many loopholes that lenders can jump through, and the APR caps are insanely high (and sometimes totally unregulated).
Installment loans are less well known to consumers and, therefore, are not as regulated despite having substantial national scope. Currently, there are approximately 14,000 authorized stores that offer this type of loan in 44 states. Alarmingly, the biggest provider has more reach than any traditional bank!
According to federal statistics, 12 million borrowers use installment lenders each year and tend to take loans of $ 100 to over $ 10,000, which they then pay over $ 10 billion in fees from these. consumer credit companies.
These providers must operate under state laws that govern the following:
Amount of the loan
However, as we mentioned earlier, statutory rules vary by state. Although it is interesting to note that installment loans are generally repayable in 4 to 60 monthly installments. These average around $ 120 per installation
How installment loans work
As mentioned, consumer finance companies provide installment loans in 44 states to those with bad credit history. Funding fees vary by state, however, they are all generally higher than traditional banks or credit unions.
According to Titlelo.com, installment loans allow you to borrow a lump sum of money and pay it back over a predetermined period (usually in monthly installments). There is significant market dominance, with 20 lenders owning more than 7,000 of the country’s 14,000 consumer credit stores.
Research shows that southern states regulate additional fees less. Thus, their loans cost significantly more than in the northern states. Interestingly, there are more stores per capita in the south, as you can see here.
Terms and conditions of the installment loan
State laws define the terms and conditions for acquiring an installment loan. Although they vary depending on your condition, there seems to be a general understanding of how they work.
To get a loan from one of these providers, you must first apply at your nearest branch. From there, you must bring your proof of address and identity. Typically, a pay stub will be required to complete the transaction.
You get the approval within 15 to 60 minutes, and the money will be deposited into your bank account by check.
The total cost of the loan (i.e. interest, fees, ancillary payments, and financial payments) is regulated by the federal and state governments, specifically the Truth in Lending Act (TILA ).
What is TILA?
This federal law was enacted in 1968 to protect borrowers who seek money from creditors and lenders. It consists of several regulations that have been made by the Federal Reserve Board.
The most important parts of the Truth in Lending Act are as follows:
Features of the prejudicial installment loan
Remember when we mentioned the weaknesses of federal and state laws regarding installment loans? Well, that applies here.
Lenders always offer harmful offers because there are no regulations to prevent them from doing so.
# 1 Sale of ancillary products
First, let’s look at the definition of “ancillary products”.
To put it simply, these are additional non-essential “perks” that lenders will tout on top of their loans. This can include insurance policies and other non-insurance products like club memberships.
The lender will advertise them to you in a way that will make them useful to you. But in reality, they only benefit the lender.
There should be state or federal laws that prevent this from happening because many borrowers have wasted a lot of income on these shallow products.
# 2 Set-up and acquisition costs
These fees are non-refundable and are either a lump sum or a percentage of the loan amount.
They are usually calculated after the loan has already been granted to you and are linked to the amount you owe.
While these fees should only be paid once. There is no state regulation that supports this. For this reason, they are usually charged each time you refinance your installment loan.
Not to mention that they expect these to be paid if you choose to prepay the loan.
# 3 No all-inclusive APR regulation
The all-inclusive APR is the actual amount you pay after all fees and other costs have been calculated. The problem? It turns out to be much higher than the APR initially indicated on the contract!
Usually, the all-inclusive APR is 90% for loan amounts of $ 1,500 or less, and 40% for larger loan amounts. However, the loan contracts only mention 70% and 29% interest, respectively.
Although the TILA requires that the APR be indicated, this excludes the cost of ancillary products and acquisition costs. This makes it difficult for consumers like you to accurately compare prices.
# 4 Credit insurance
Installment lenders often try to sell credit insurance with their loans. They state that it covers you if you cannot repay the loan. But this is not the case.
Insurance adds huge sums of money to your loan. Not to mention that the actual amount you are covered for is incredibly low (often lower than the minimum stated by regulators).
Government Installment Loans: Where Are They Now?
While most states follow federal regulations and therefore have equally weak lending laws, 2020 has seen a few states upping their game.
Colorado, New Mexico, Ohio and California have improved their regulations, ensuring that APR caps exist for all lenders, and where they already exist, states have lowered them. Fortunately, these states now have maximum APRs of 36% or less for loan terms of 6 months.
Sadly, the same can’t be said for Oklahoma and Iowa. These states have increased the APR limits for installment lenders, decreasing the financial stability of consumers.
This article does not necessarily reflect the views of the editors or management of EconoTimes.