Payday Loans versus Installment Loans

Regulations used to manage the payday lending industry have caused some lenders to shift from offering payday loans to installment loans. The shift is just part of an evolution in payday lending, as both lenders and regulators try to come to some agreement on how to offer the service without indebting people severely. One of the key points involved is the ability of borrowers to take out a payday loan and then get into debt because they don’t repay it entirely on their next paycheck cycle. However, payday lenders argue that the loans are for short-term purposes and were never meant to be rolled over continuously. Despite this disagreement, severe regulations were in place and then softened later as Republicans took control of the House.

The Tale of the Tape?

The regulations still puts limits on loans that are defined as “payday loans.” In general, these short-term loans average about a 2 week term for funds of about $2000 or less, paid back with a higher rate of interest than most conventional lending. In a way, they can be called “balloon” loans because the total plus fees and interest are due at the end of a very short term. If not, more interest accrues and the borrower can find it difficult to repay.  Due to payday lending restrictions, some payday lenders have chosen to include installment loans in their offerings now.

An installment loan is not due completely in one lump sum. Instead, it is paid off over time in installments. The main difference between a payday loan and an installment loan is that the balance does not change for an installment loan. The loan is amortized and calculated to determine how much you owe and cannot be rolled over, like a payday loan. Whatever you are contracted to pay at the end of your term, that’s what is due. In recent legislation any loan that is 90 days or less is described as a payday loan, meaning installment loans of even four months duration can now bypass payday regulations and be called an installment loan.

Both are Serious Contenders.

Even though they are being called installment loans, they can still carry interest rates of 500 percent or more. Many legislators have wanted to put limits on the amount of interest one can charge on these types of alternative lending, but so far have been unable to do so. Typically, the longer term a loan has, the more you will owe in interest. Thus, there will always be a need for short-term payday loans as the interest and fee can end up being less if paid back on time. As legislators have learned, payday lending is needed niche for low-income borrowers who need them as a way to fund an emergency. Often, other sources of credit are not available to them either due to bad or non-existing credit. These types of loans can be a lifeline for people, and when they repay them on time, the same borrower will often take out more than one payday loan a year.

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