Can Payday Loan Alternatives Increase Your Financial Risk?

The Consumer Financial Protection Agency cracked down on payday lending by pushing for new laws and more consumer awareness. Many states are changing laws by capping fees and interest rates, such as Ohio where interest rates are capped at 28 percent. Others offer installment loan options as an alternative to a payday loan.

In fact, Pew Charitable Trust finds 26 states now allow payday loan companies to offer installment loans. Payday loans require one lump-sum payment that’s typically due two weeks after receiving the money. Installment loans allow borrowers to pay for months or years, and it’s not necessarily good news for the borrower.

Increased Numbers of Installment Loans for Poor Credit

According to the Wall Street Journal, 2015 saw an increase in installment loans to people with poor credit. In fact, the number of installment loans increased by 77 percent. The belief is that installment loans are easier for people with credit scores of 600 or less to handle, as it’s easier to make smaller payments. The problem is that borrowers are not looking at the terms that still favor payday loan companies.

Lengthened Terms Still Leads to Increased Interest

Payday loans require quick repayment, so many feel stretching that payment out over a span of months and years is easier. Pew Charitable Trusts studied installment loans and found that the interest payments were still high, often reaching an APR of as much as 600 percent. Installment loan companies charge high interest and generally earn more in interest with installment loans than they were with 14- or 30-day payday loan terms.

Plus, no one is looking at the debt-to-income ratio. Many borrowers with poor credit are agreeing to terms that require monthly payments of more than 10 percent or more of their total monthly income. Borrowers are paying just as much money in interest and fees.

As an example, with one company offering installment loans in Texas, a $500 loan comes with an APR of 535 percent. You make seven monthly payments of $145, bringing the total you’ve paid to just under $1,016.

If a payday loan is your only option, carefully compare payment plans and lender terms. Shopping around for the lowest interest rate is ideal. Do not sign paperwork until you understand exactly how much you will repay and what your options are if you fall short of cash one month.