What’s the Difference Between a Payday Loan and an Installment Loan?

male lion sitting in the safari

If you’re looking to borrow, you may already know about payday loans—they’re fast, dangerous, and designed to take advantage of those in need. (Think of them as the jackal of the lending animal kingdom.) Is there a better option? Something just as fast, but… you know, not evil?
You bet there is.
When it comes to lending, consider the personal installment loan the noble lion, king of the lending jungle.

Payday Loans: Scavenging on your finances.

“Payday loans… can destroy a borrower’s credit and wipe out their bank account.”

Payday loans are short-term, unsecured loans that target the financially vulnerable—the low income, the elderly, and those without limited financial education. Payday lenders won’t perform a credit check and, depending on the restrictions in your state, they may not even check your income first.

Fast money without a credit check? What could be wrong?

Well, a lot. Payday loans charge unfair fees and massive interest rates, meaning they have extraordinarily high annual percentage rates (APRs)—the measurement that allows you to see the full cost of a loan.

Certified financial educator Maggie Germano (@MaggieGermano) says, “Payday loans usually turn out very negatively for the borrower. Interest rates and fees are sky-high and many people are unable to pay them back in time. Every time you miss your payment due date, the amount owed increases significantly. This makes it impossible for people living paycheck to paycheck to pay them off. This can destroy a borrower’s credit and wipe out their bank account.”

It may be tempting to try out the fast, risky option with the short payment terms, but don’t forget: it’s a trap. Read more about payday loans in our eBook How to Protect Yourself from Payday Loans and Predatory Lenders.

Installment Loans: The lion king of lending 

“A good installment [loan]… can actually build up your credit and [help you] qualify for a better loan next time.”

When it comes to payment terms, installment loans are the exact opposite of payday loans. Instead of having to make a massive payment in a short amount of time, installment loans offer you the chance to make regular, smaller payments over a much longer period.

Most installment loans will offer you a MUCH lower APR on your loan than a dangerous payday loan and also—unlike many payday loans—they won’t charge a sneaky prepayment penalty.

What’s a prepayment penalty? Law professor David Reiss (@REFinBlog) sums it up well: “Prepayment penalties come into play if the borrower repays all or part of a loan before the payment schedule that the borrower and lender had agreed upon when the loan was first made. In theory, they compensate the lender for the costs of making the loan in the first place and any decrease in interest payments that the lender would get as a result of early repayment. In practice, prepayment penalties can be a new profit center for lenders if the fees are set higher than the amounts actually lost by prepayment.”

A good installment lender will also report your payments to credit bureaus, so you can actually build up your credit and qualify for a better loan next time.

So which loan is right for you? 

If you know with 110% certainty that you’ll be able to pay off your loan, with all of the interest and fees, as soon as it is due, then a payday loan may be a workable option. But that’s not usually what happens. In fact, according to the Consumer Financial Protection Bureau, four out of five payday loan borrowers find themselves forced to rollover (extending the term of their loan at the cost of another round of fees and interest)1 and the average payday borrowers are in debt to their lender a stunning 200 days of the year.2 So remember, with a payday loan, the odds are never in your favor.

Installment loans are a safer option, especially if you find a lender who is willing to work out terms that fit for you. It’s also important that they have good customer service representatives so you can reach someone in advance if you’re ever worried you might miss a payment. Finally, make sure that there’s no prepayment fee and they report your payments to credit bureaus so you can get an even better loan next time.

The world of lending can certainly feel like a jungle. So always go with a trusted, reliable leader—rather than a dangerous predator running down easy prey.

References
1 “CFPB Finds Four Out Of Five Payday Loans Are Rolled Over Or Renewed.” ConsumerFinance.gov March 25, 2014 https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-four-out-of-five-payday-loans-are-rolled-over-or-renewed/. Accessed 30 March 2017.

2 Morran, Chris. “The Average Payday loan Borrower Spends More Than Half The Year In Debt To Lender.” Consumerist. April 26, 2013. https://consumerist.com/2013/04/26/the-average-payday-loan-borrower-spends-more-than-half-the-year-in-debt-to-lender/. Accessed 23 March 2017.


Contributors

Maggie Germanois a Certified Financial Education Instructor and financial coach for women. Her mission is to give women the support and tools that they need to take control of their money, break the taboo of discussing debt and income, and achieve their goals and dreams. She does this through one-on-one financial coaching, monthly Money Circle gatherings, her weekly Money Monday newsletter, and speaking engagements. To learn more, or to schedule a free discovery call, visit maggiegermano.com.

David Reiss, is a professor at Brooklyn Law School and director of academic programs at the Center for Urban Business Entrepreneurship. He is the editor of REFinBlog.com, which tracks developments in the changing world of residential real estate finance.

What is the Payday Loan Debt Cycle?

Payday loans. You know they’re bad. And if you don’t, we have some information for you: payday loans are bad. Like, dangerous, disastrous, how-are-these-even-legal bad.
From high-interest rates, to short terms, and deceptive practices, there are many reasons why payday loans are best avoided.
But what exactly makes these predatory loans the worst of the worst? A little thing called the payday debt cycle.

What are Payday Loans?

According to Michelle Hutchison (@MichHutchison), a money expert at finder.com (@findercomau), “A payday loan is a short-term, alternative form of credit that can be accessed quickly, even by those with bad credit or no or low incomes. Given the higher risk these loans have for the lender from people who typically have poor credit, and that the loans are unsecured, they generally have higher fees and interest rates than you’ll find for other loan types like personal loans and credit cards.”

And it’s not just the interest and fees you have to watch out for, as Hutchison points out: “They are designed to help people out in a pinch—or between paydays—so the repayment terms are often shorter, ranging from two weeks to a month and occasionally extended to six months.”

Why do people use Payday Loans? 

People tend to seek payday loans when their credit scores are too low to qualify for a traditional loan from a bank or credit union. Additionally, applying for many types of loans can even further damage your credit score. As John Ganotis, founder of Credit Card Insider (@CardInsider) explains: “A credit check from a lender results in something called a hard inquiry. A hard inquiry is a normal part of the lending process and will remain on your credit reports for two years.”

Because payday lenders do not perform a credit check, many potential borrowers with bad credit in need of a loan see payday lenders as their only option to avoid a credit check that could further harm their credit. A better option might be to seek out a lender who performs a “soft credit check,” which will not affect your credit score. But we aren’t talking about what happens with the better option. We’re talking about payday loans.

How do borrowers get trapped by Payday Loans? 

OK, so let’s say you’ve taken out a payday loan (maybe you didn’t know how dangerous they are, or didn’t think you had other options). The interest rate is astronomically high (350 percent) and the terms are really, really short (two weeks). So what happens in the likely event that you aren’t able to pay the money you borrowed (plus all that interest) in time?

You’ll be forced to pay an expensive “rollover” fee to extend the loan. That’s a cost you probably can’t afford, and that’s before you even start to calculate all of the additional interest that will build up from the extension. It’s not hard to see how you might have to roll over the loan again. And again. All while the debt builds up and your credit score goes down. This is it. The dreaded Payday Loan Debt Cycle.

You keep paying. The interest keeps mounting. And all of a sudden, that “two-week loan” is lasting months and months.

As financial writer Jen Smith (@savingwithspunk) told us, “The debt cycle looks different in every family. Sometimes it’s obvious to everyone that debt has been abused but in most cases, debt is gradually racked up and ignored until it builds up to the point that people feel like foreclosure, bankruptcy, or worse are their only options.”

Can you escape the Payday Loan debt cycle? 

According to Jen Smith, “Education is key to escaping the debt cycle. It’s imperative we teach kids and teens about money at appropriate comprehension levels. Many will argue that kids should learn personal finance at home or they won’t listen. Those reasons aren’t good enough for us to leave financial literacy out of schools. Ideally, every grade would have a curriculum with age-appropriate money topics. And more financial literacy content on the internet, where adults spend most of their time, that’s relevant and relatable to people with low incomes is needed to help adults.”

For escaping your own personal debt cycle, you shouldn’t be afraid to ask for help if you know someone in your life who might be able to provide it. Beware of “payday relief” companies, many of which are scams and will just make your situation even worse (read more in our white paper The OppLoans Guide to Safe Personal Loans). One of your better options might be trying to call the loan company directly and see if you can settle for a lesser amount.

You might also consider taking out a personal installment loan with better terms than your payday loan. If your new lender reports on time payments to the credit bureaus, you could actually improve your credit while escaping the payday loan debt cycle.

Bottom line:

It’s not always easy to get out of debt. But budgeting, paying down credit cards, installment loans, and avoiding predatory payday and title loans can help you do it.

Paying off debt and improving your credit will make better options available to you the next time you need money.


Contributors

John Ganotis is the founder of CreditCardInsider.com John comes from a diverse background of software development, web publishing, and personal finance. He knows firsthand what it’s like to accumulate credit card debt, pay it off completely, and then start using credit to his advantage. His passion for technology and attention to detail have made Credit Card Insider one of the premier credit resources on the Internet, and he is eager to help others tackle debt and use credit as a powerful tool rather than fear it.

Michelle Hutchison is finder.com‘s resident Money Expert. Michelle has over seven years’ experience in the financial services and online industries and is a regular commentator on money-related issues. After completing a Bachelor of Arts degree from Australia’s Macquarie University, majoring in Media, Michelle began her career as a journalist in regional radio and TV newsrooms, before working in other media outlets in positions ranging from reporter to editor.

Jen Smith is a personal finance and debt payoff expert. She has been featured on Student Loan Hero, The Penny Hoarder, and AOL Finance. Her website is sSavingWithSpunk.com

Payday Loan Rollover: How Short-Term Loans Turn Into Long-Term Debt

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4 out of 5 payday loan borrowers wind up extending their loans and paying much, much more than they expected to than when they originally borrowed.1 How does this happen? Through a harmless-sounding technique called rollover.

Why Do People “Need” Payday Loans in the First Place?

People who turn to payday loans often have “bad” credit score—a FICO score of 630 or less.

Not sure what a credit score is? Let Katie Ross, Education and Development Manager for American Consumer Credit Counseling explain. “A credit score is all of the data contained in a credit report, which includes credit history and current account statuses, all compiled into one number using the same method for every consumer so it is standardized. The score is a tool for creditors to quickly assess borrowers to make initial product and interest rate offerings without performing a full credit inquiry.”

If you have a low credit score, then you’ve likely had an experience of getting shut out of from borrowing from traditional institutions like banks or credit unions. And it means that the interest rates you pay on the loans you can get are going to be much higher.

Lenders that serve these “subprime” borrowers—people whose credit scores are below average—charge those higher rates in order to protect themselves from risk. Since subprime borrowers default on their loans at a higher rate than borrowers with prime scores, lenders risk losing too much money if they charged them normal interest rates.

Enter: payday loans.

On paper, these are short-term loans with high-interest rates—the perfect way for someone with poor credit to get cash in a hurry. But in the real word, many payday loans end up trapping borrowers in a cycle of extremely high-cost debt, one from which it can take them years to escape. And the reason for that can be summed up in one simple word: rollover.

How does loan rollover work?

When a person cannot afford to pay their payday loan off by the given date, many lenders will give them the opportunity of “rolling over” their loan. It’s basically giving them an extension on the loan’s due date in return for an additional fee.

The most common form of loan rollover involves the borrower paying off only the interest owed on their loan. So for a 14-day, $300 loan with a 15 percent interest rate, rolling the loan over would mean paying the lender the $45 owed in interest in order to secure a 14-day extension on the due date.

But what about that additional fee? Well, what happens is that the lender then charges the borrower an additional 15 percent in interest on this new, extended term. In one fell swoop, the cost of borrowing for this payday loan jumps from 15 percent to 30 percent. That’s a big jump!

And if the borrower is still unable to pay their loan off after the new 14-day term, the lender might have them roll their loan over again.  That’s an additional $45 paid, and an additional 15 percent interest fee charged. The cost of borrowing has now risen to 45 percent, and the borrower is nowhere closer to paying off the original $300 they borrowed.

That’s how a “short-term” payday loan can so easily turn into a long-term problem.

The cost of rollover

If the main appeal of payday loans is that they can get you out of debt fast, then rolling a loan over and over again would seem entirely unappealing. And yet, it’s a fact that many payday loan customers end up with long-term debt.

According to a 2014 study from the Consumer Financial Protection Bureau (CFPB), 80 percent of all payday loans are the result of rollover or reborrowing—which is the practice of taking out a new payday loan soon after the old one is paid back. (Like rollover, reborrowing is a sign that a given borrower cannot afford to pay back their payday loan.) This begs the question: would the payday loan industry survive if its customers could afford to pay back their loans the first time?

Maybe not. Another study from the CFPB cites an alarming statistic: the average payday loan customer takes out 10 loans per year and spends almost 200 days in debt. Even though payday loans are sold as a “short-term” debt solution, these numbers point to a pattern of long-term indebtedness.

The reason that rollover (and reborrowing) are so common for payday loans likely has something to do with how these loans are structured. Specifically, how they are designed to be paid back all at once. According to a study from the Pew Charitable Trusts, the average payday loan borrower states they can afford about $100 a month towards their loan, even though they owe closer to $430.2 With only a few short weeks to pay back the loan, many payday loan borrowers find that they simply cannot afford to pay the loan back all at once.

How to Avoid Payday Loans

Folks with bad credit who are considering a payday loan should instead do two things.

The first thing they should do is consider out taking a long-term installment loan instead—as these loans designed to be paid off in a series of small, manageable payments (read more in What’s the Difference Between a Payday Loan and an Installment Loan?). Instead of accruing an additional interest fee every two weeks without ever touching the loan’s principal amount, borrowers who take out an installment loan would be paying both off principal and interest with every payment they make.

The second thing these people should do is focus on improving their credit scores. The better their credit, the less likely they are to resort to a payday loan.

“It’s no secret that consumers with excellent credit have access to their best credit cards and lowest interest rates,” says Chris Piper, Director of Market Strategy for DriveTime Automotive Group. “Having subprime credit can negatively affect your ability to finance a vehicle, own a home and even got a job – especially if you will have access to money or its’ in the finance industry. Slowly working on improving your credit is imperative to reducing financial stressors in your life.

Piper stresses that, “Outside of regularly reviewing their credit reports and scores (and knowing that you should never pay to review your credit reports or scores), subprime consumers should understand what element of their credit history is keeping their score low.”

He says that “it might be as simple as an incorrectly reported delinquency, or maybe the utilization on a single credit card is too high and negatively impacting their score. Knowing what the exact reasons why their score is low and practicing good credit hygiene and resolving those issues, when possible, is a sure-fire way to move out of the subprime credit range.”

According to Sacha Ferrandi, founder of Source Capital Funding, Inc., “One of the best ways to avoid payday and predatory lenders is to treat credit cards like debit cards, paying back the credit card loan as soon (or shortly after) you make the purchase. This is a great example of borrowing responsibly, as the credit card simply becomes a way to earn points in addition to making a purchase.

If you have credit card debt, make sure to pay off that debt on time” says Ferrandi. “Missed payments will severely hurt your credit score and if your credit score drops low enough, financing from a bank will become next to impossible, leaving only payday advances to rely on if an emergency arises.”

And even if you still need to take out a loan, choosing a personal installment loan could help you pay your bills and improve your credit at the same time. Certain lenders, like OppLoans, report your payment information to the credit bureaus. Payment history a huge factor in how credit scores are calculated.

While there are no “magic bullets” when it comes to raising your score, making your payments on time is a great place to start. Plus, with an installment loan, you’re more likely to have payments you can actually afford. Unlike payday loans, installments loans are designed to be paid off the first time—no rollover required.

Works Cited

1 “CFPB Finds Four Out Of Five Payday Loans Are Rolled Over Or Renewed.” ConsumerFinance.gov. Accessed on February 10, 2017 from https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-four-out-of-five-payday-loans-are-rolled-over-or-renewed/.

2 “How Borrowers Choose and Repay Payday Loans.” PewTrusts.org. Accessed on February 10, 2017 from http://www.pewtrusts.org/~/media/assets/2013/02/20/pew_choosing_borrowing_payday_feb2013-%281%29.pdf



About the Contributors:

Sacha Ferrandi, is the Founder of Source Capital Funding, Inc. (HardMoneyFirst.com) and is an expert in finance, entrepreneurship, and real estate. Source Capital Funding, Inc., is based in San Diego and operates across the United States.

Chris Piper, Director of Market Strategy for DriveTime Automotive Group (DriveTime.com), the nation’s largest used car dealership network helping people with less-than-perfect credit find and finance a vehicle.

Katie Ross, joined the American Consumer Credit Counseling (ACCC) management team in 2002 and is currently responsible for organizing and implementing high performance development initiatives designed to increase consumer financial awareness. Ms. Ross’s main focus is to conceptualize the creative strategic programming for ACCC’s client base and national base to ensure a maximum level of educational programs that support and cultivate ACCC’s organization.

How (and Why) to Calculate the APR for a Payday Loan

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Sure, you may know that taking out a payday loan is generally a bad idea. You’ve heard a horror story or two about something called “rollover”, but if you’re in a jam, you might find yourself considering swinging by the local brick-and-mortar payday loan store or looking for an online payday loan. It’s just a one-time thing, you tell yourself.

It only gets worse from there… Once you start looking at the paperwork or speaking with the sales staff, you see that your payday loan will cost only $15 for every $100 that you borrow. That doesn’t sound that bad. But what’s this other number? This “APR” of 400%? The payday lender tells you not to worry about it. He says, “APR doesn’t matter.”

Well, let’s just interrupt this hypothetical to tell you this… When you’re borrowing money, the APR doesn’t just “matter”, it’s the single most important number you need to know.

APR stands for “annual percentage rate,” and it’s a way to measure how much a loan, credit card, or line of credit is going to cost you. APR is measured on a yearly basis and it is expressed as a percentage of the amount loaned. “By law, APR must include all fees charged by the lender to originate the loan,” says Casey Fleming (@TheLoanGuide), author of The Loan Guide: How to Get the Best Possible Mortgage.

But just because a loan or credit card includes a certain fee or charge, you shouldn’t assume that it’s always going to be included in the APR. Fleming points out that some fees, like title fees on a mortgage, are not considered part of the loan origination process and thus not included in APR calculations.

“Are DMV fees connected with a title loan? Some would say yes, but the law doesn’t specify that they must be included,” says Fleming.

According to David Reiss (@REFinBlog), a professor of law at Brooklyn Law School, “the APR adds in those additional costs and then spreads them out over the term of the loan. As a result, the APR is almost always higher than the interest rate—if it is not, that is a yellow flag that something is amiss with the APR.”

This is why it’s always a good idea to read your loan agreement and ask lots of questions when applying for a loan—any loan.

APR can sometimes be a tricky measure

If you’re talking about long-term financial products like mortgages or credit cards, APR can get complicated in a hurry.

With mortgages, there can be a ton of fees involved—some of which might very well be excluded from the APR. And with credit cards, your interest usually ends up compounding on a daily basis, which means that you’ll end up paying more than the stated APR.

What does “compounding interest” mean? Well, it means that your interest charges get added to your principal loan amount, which means that you start getting charged interest on your interest. Fun, right?

One more way that APR can be misleading has to do with amortizing installment loans. With these loans, which are paid off in a series of equal, regular payments, a certain portion of each payment always goes towards your principal loan amount. As the principal goes down, the amount of money that is accrued in interest goes down too.

The APR is a measurement of the cost of a loan over its lifetime, calculated from the snapshot of the origination date.” Says Fleming. “If you were to calculate the APR over the balance of a loan midway through its term the number would be different because the advance fees and interest have already been paid. “

Payday Loan APRs are simple (and simply unacceptable)

Compounding interest isn’t something you’ll have to worry about with a payday loan. The principal stays the principal and the interest stays the interest.

And payday loans don’t amortize either. The interest you pay on a payday loan is usually referred to as a “finance charge” and it is a simple fee based on the amount you borrow. For instance, a $300 payday loan that costs $20 per $100 borrowed would have a finance charge of $60.

When considering a loan, you’ll definitely want to make sure it doesn’t include any hidden or additional fees (read more in the eBook How to Protect Yourself from Payday Loans and Predatory Lenders). Other than that, calculating the APR should be a good way to calculate just how expensive that loan is compared to your other options.

In fact, you’ll probably be pretty surprised.

How to Calculate APR for Payday Loans

When calculating the APR for a payday loan, you are going to need three pieces of information.

  1. The principal loan amount, or how much money you are borrowing
  2. The amount you’re paying in interest on the loan, also referred to as the “finance charge.”
  3. The length of the repayment term, or how long the loan will be outstanding.

Got that? Okay.

To make things a bit easier to understand, let’s use an example:

Payday Loan #1 has…

  1. A principal loan amount of $400
  2. An interest amount/finance charge of $80 (a rate of $20 per $100 borrowed)
  3. A repayment term of 14 days.

First, you’ll want to divide the interest/finance charge by the loan principal:

$80 / $400 = 0.2

This tells you how much you are paying relative to how much you are borrowing. 0.2 translates to a rate 20%, which means that you are paying a 20 cents on every dollar that you borrow.

Next, you’ll want to multiply that result by 365, for the number of days in a year:

0.2 x 365 = 73

Next, you’ll want to divide that result by the length of the repayment term:

73 / 14 days = 5.214285

That final result basically states that, if your payday loan were to be outstanding for a full year, you would pay over 5 times the amount you originally borrowed in fees and/or interest. To convert into APR, just move the decimal point two spaces to the right and add a percentage sign:

521.43% APR

(Thanks to ConsumerFed.org for this formula.)

Why is the APR for payday loans so high?

According to David Reiss, “The APR takes into account the payment schedule for each loan, so it will account for differences in amortization and the length of the repayment term among different loan products.”

Keep in mind, that the average term length for a payday loan is only 14 days. So when you’re using APR to measure the cost of a payday loan, you are essentially taking the cost of the loan for that two-week period, and you’re assuming that that cost would be applied again every two weeks.

There are a little over 26 two-week periods in a year, so the APR for a 14-day payday loan is basically the finance charges times 26. That’s why payday loans have such a high APR!

But if the average payday loan is only 14 days long, then why would someone want to use APR to measure it’s cost? Wouldn’t it be more accurate to use the stated interest rate? After all, no one who takes out a payday loan plans to have it outstanding over a full year…

Short-term loans with long-term consequences

But here’s the thing about payday loans: many people who use them end up trapped in a long-term cycle of debt. When it comes time for the loan to be repaid, the borrower discovers that they cannot afford to pay it off without negatively affecting the rest of their finances.

Given the choice to pay their loan off on time or fall beyond on their other expenses (for instance: rent, utilities, car payments, groceries), many people choose to roll their loan over or immediately take out a new loan to cover paying off the old one. When people do this, they are effectively increasing their cost of borrowing.

Remember when we said that payday loans don’t amortize? Well, that actually makes the loans costlier. Every time the loan is rolled over or reborrowed, interest is charged at the exact same rate as before. A new payment term means a new finance charge, which means more money spent to borrow the same amount of money.

“As the principal is paid down the cost of the interest declines,” says Casey Fleming. “If you are not making principal payments then your lifetime interest costs will be higher.”

According to the Consumer Financial Protection Bureau (CFPB), a whopping 80% of payday loans are the result of rollover or re-borrowing and the average payday loan customer takes out 10 payday loans a year.

Reiss says that “the best way to use APR is make an apples-to-apples comparison between two or more loans. If different loans have different fee structures, such as variations in upfront fees and interest rates, the APRs allow the borrower to compare the total cost of credit for each product.

So the next time you’re considering a payday loan, make sure you calculate its APR. When it comes to predatory payday lending, it’s important to crunch the numbers—before they crunch you!



About the Contributors:

Casey Fleming, began as an appraiser in 1979 and built one of the largest appraisal and consulting firms in the San Francisco Bay Area.  He sold the firm in 1995 to transition to mortgage lending. Casey built a team of 300 loan agents from 2003 through 2008, mentoring dozens of senior agents and producing training meetings for hundreds. After the Financial Crisis Casey wrote The Loan Guide: How to Get the Best Possible Mortgage.  to help consumers protect themselves from predatory practices. Today Casey is passionate about educating consumers.

David Reiss, is a professor at Brooklyn Law School and director of academic programs at the Center for Urban Business Entrepreneurship. He is the editor of REFinBlog.com, which tracks developments in the changing world of residential real estate finance.

 

What’s Up with Payday Loans in Kansas City?

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How Many Payday Lenders in Kansas City, MO Have Been Ordered to Pay Settlements in the Past Two Years?

You give up? Four. The answer is four.

That’s right. In the past two years, four payday lenders lenders in the Kansas City-area have paid—or at least been ordered to pay—financial settlements to the US government as a result of unethical business practices.

So What Gives?

Turns out, Kansas City, MO is something of a hub for payday lenders. In Fact, Kansas City alt weekly The Pitch has called Kansas City, “the payday-lending capital of North America.[1] These are businesses that offer short-term, high-interest loans to people who need cash and don’t have (or don’t believe they have) better options available to them.

In each of these cases, it was determined that these payday lenders were taking advantage of customers—usually through misleading terms, confusing loan agreements, and interest rates as high as 700%.

One of these lenders, so-called “payday loan mogul” and, umm, professional racecar driver, Scott Tucker, was just handed a $1.266 billion judgement in federal court. That’s the largest settlement in Federal Trade Commission (FTC) History.

Another lender, Walter Mosely Sr., whose case had not yet been decided, was arrested on the same day as Tucker on similar charges.[2] Mosely’s lending group, by the way, was called Hydra Lenders which … come on, that isn’t even subtle. If you’re going to start a predatory lending business, maybe picking the same name as the very famous bad guys from Captain America isn’t a great idea.

Then there are Tim Coppinger and Ted Rowland, two payday lenders who also settled with the FTC over charges of deceptive and unethical lending. Coppinger was ordered to pay $32 million and Rowland was ordered to pay $22 million.[3]

So what’s being done about it?

If you want to know what's going on with payday lending in America, check out what's happening in Kansas City, Mo.

Since Kansas City is an industry hub for payday lending, it's clearly drawing a lot of attention. For instance, it is no coincidence that the Consumer Financial Protection Bureau chose Kansas City of all places to announce their new rules to crack down on predatory payday lending. If you want to know what's going on with payday lending in America, check out what's happening in Kansas City, Mo.

And what is happening with payday loans in Kansas City right now is exactly what should be happening. The federal government is stepping in, investigating reports of abuse and issuing heavy fines to lenders who have engaged in unethical behavior. Did you know that the $1.266 billion dollar settlement against Scott Tucker the largest settlement in the FTC's history? Sounds like they’re taking this seriously.

At OppLoans, we believe in being socially responsible, and in issuing loans that our customers can afford to repay. People with less-than-perfect credit deserve better than payday loans in Kansas City, and everywhere else. So for the sake of borrowers in Kansas City, and around the country, we hope to see lots more stories like these ones in the months and years to come.

References:

  1. Vockrodt, S. “KC’s dethroned online payday lenders aren’t gaming the feds anymore.” Retrieved October 12, 2016 from http://www.pitch.com/news/feature-story/article/20553808/payday-lending-kansas-city-joel-tucker

  2. McGuire, D., Rosen, S. Campbell, M. “KCC payday lenders Scot Tucket and Richard Moseley Sr. indicted in federal crackdown.” Retrieved October 10, 2016 from http://www.kansascity.com/news/business/article59551056.html

  3. Hudnall, D. “Unpacking the FTC's payday-lending settlement with Tim Coppinger and Ted Rowland.” Retrieved October 12, 2016 from http://www.pitch.com/news/article/20562219/unpacking-the-ftcs-paydaylending-settlement-with-tim-coppinger-and-ted-rowland

Finance Fridays: Another Rough Week for Payday Loans

FF2 (1)

Payday loans continued to make headlines for all the wrong reasons this week. Between more cities and states enacting tougher regulations against payday loans, criminal banking practices coming to light, and socially responsible lending innovators winning major awards (what?) this was a busy week. At OppLoans, we track these stories closely because nothing is more important to us than helping borrowers avoid these predatory lenders and their bad products. So, for payday loan and personal finance newshounds like us, this was another big week of headlines.

Check out all the lending, saving, and budgeting stories that hit our radar this week. We’ve put one favorite at the top (shout out to socially responsible lending!) followed by more helpful money tips and articles for you to enjoy. Happy (Finance) Friday!

Here are our top 10 personal finance stories from this week:

MacArthur Foundation: the 2016 “Genius Grants” were just announced and one of them caught our eye. José A. Quiñonez founded the Mission Asset Fund in San Francisco to facilitate lending circles in unbanked communities, helping folks establish a credit history from scratch. That’s … oh, what’s the word … genius!

New York Times: Massachusetts Senator Elizabeth Warren is not happy with Wells Fargo.

Cosmopolitan: Weddings are very expensive, so here’s 19 ways to save money while still celebrating your special day.

St. Louis Post-Dispatch: The Springfield, MO city council just passed a resolution supporting the Consumer Financial Protection Bureau’s (CFPB’s) proposed rules for payday lenders.

Telegraph-Forum: This article examines the effects of the CFPB’s proposed rules on payday lenders in Ohio.

Credit.com: How does having student loan debt affect your ability to get a home mortgage?

NerdWallet: Have bad credit? Let a financial expert explain how you can recover.

Forbes: Retirement is going to arrive sooner than you think. Here’s three ways you can save money to support you in your golden years.

Yahoo! News: The Holidays are coming. Do you have money for gifts? If the answer is no, check out some ways you can save money this fall.

Huffington Post: Entrepreneurs are famous for being thrifty, but here are some methods to make sure that you are cutting your costs effectively.

ICYMI this week on the OppLoans Blog:

OppLoans Word of the Week: Cash Advance

LendingTree Names OppLoans #1 Customer-Rated Personal Lender

Cut the Cord: Save Money with Cable TV Alternatives

Longer Terms or Lower Payments: Which Debt Consolidation Strategy is Right for You?

Have a great weekend everybody!

When you need cash in a hurry, it can be tempting to turn to a predatory payday or title lender. Don’t do it. Apply for a safe, reliable personal installment loan from OppLoans instead. We have longer terms, lower rates, and better customer service. To learn more, or to apply for a loan today, check out our homepage: OppLoans.com.

Have Bad Credit and Need a Personal Loan? Let’s Play the Bad Credit Lender Dating Game!

DatingGameV1

If you’re shopping around for a bad credit loan, it can be hard to know which loan is right for you. Really, it’s a lot like online dating. For one thing, just like there are a lot of sketchy people lurking online, there are also a lot of shady lenders out there looking to get matched up with inexperienced borrowers. But even among the honest and responsible lenders, how can you know which is really right for you?

Before we get to our most eligible options, here are some bad credit personal lenders that practice predatory behavior. You really can’t swipe left fast enough when you’re dealing with:

Payday Lenders

These lenders offer short-term, fast cash loans that only average around 14 days. That quick turnaround might sound nice but, in reality, these loans are pretty nasty. They have extremely high interest rates, with an average Annual Percentage Rate (APR) of 339 percent.[1] Payday loans are also structured to be paid back in a single lump sum, which is difficult for many borrowers. A lot of payday borrowers end up rolling their loans over again, trapping themselves into a continuous cycle of debt. It’s a bad relationship they just can’t get out of!

Title Lenders

Take everything we just said about payday lenders and add losing your car: That’s title loans. These are month-to-month, short-term loans with an average interest rate of 25 percent that adds up to an APR of 300 percent. Since these loans are secured by the borrower’s car title, you can usually borrow more with a title loan than you can with a payday loan. However, it also means that the lender can repossess your vehicle if you can’t pay the loan back. In fact, one out of every five title loan customers eventually has their car repossessed.[2] Imagine if you had to give someone your car in order to break up with them. That’s a person you should avoid!

Okay, now that we’ve got the bad eggs out of the way, here’s a few types of bad credit personal lenders that you can swipe right on and see where things take you:

Personal Installment Lenders

These lenders offer long-term installment loans, which usually have a minimum term of six months and are designed to be repaid in a series of equal, regularly scheduled payments. Their loans are also amortizing, which means that every payment you make goes towards both the principal loan amount and the interest. Dating them would be a calm, loving series of Netflix binges, home-cooked meals, and weekend antiquing. OppLoans is a personal installment lender, and our interest rates are 70 to 125 percent lower than your typical payday lender. That last part isn’t true of all installment lenders by the way. If you’re taking out an installment loan, you’ll still want to do your research. To learn more about OppLoans, or to apply for a personal installment loan today, just visit our homepage: www.OppLoans.com.

Credit Unions

These lenders work a lot like traditional banks, only they are not-for-profit, member-owned organizations. Credit unions also have different requirements for membership than banks do. Being eligible for membership could depend on where you work or live, or even where you go to church. Credit unions that belong to the National Credit Union Administration (NCUA) offer Payday Alternative Loans. These loans have principals between $200 and $1000, terms that are one to six months long,[3] and interest rates that are capped at 28 percent.[4] That could be a great deal! However, you have to be a member for one month before you qualify for one of these loans. They’re a great date, but they’re picky.

Charities and Community Organizations

If you have bad credit and need a small cash loan, you might be able to get one from a local charity in your area. Many of these organizations have small-dollar lending programs with reasonable rates that are aimed at combating predatory payday lending in small communities. Some even offer credit-counseling services, which can help you build a budget, practice better financial habits, and improve your credit score over time. They help you grow and make more responsible decisions—like any good partner should.

We all know people sometimes need a financial partner. So skip the predators and go with a reliable, honest, financial institution that has your best interest at heart!

References:

  1. “Payday Loans and Deposit Advance Products.” Retrieved September 6 from http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf.
  2. Pascual, K. “1 In 5 Auto Title Loans End In Car Repossession: CFPB Study.” Retrieved September 6, 2016, from http://www.techtimes.com/articles/159308/20160518/1-in-5-auto-title-loans-end-in-car-repossession-cfpb-study.htm
  3. Payday Loan Alternatives. MyCreditUnion.Gov. Retrieved September 1, 2016, from http://www.mycreditunion.gov/what-credit-unions-can-do/Pages/payday-loan-alternatives.aspx
  4. Aho, K. “Payday Loans: How They Work, What They Cost.” Retrieved September 1, 2016, from https://www.nerdwallet.com/blog/loans/payday-loan-alternatives-dodge-debt-trap/

OppLoans Word of the Week: Rollover

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If you’re shopping around for quick loans that can get you through to your next payday, be sure to read all the fine print. Not only do most of these fast cash loans come with high annual interest rates, they also require lightning-fast turnaround. In fact, the typical repayment term for a payday loan is only 14 days. Take a second and ask yourself: If you owed a lender $500 or more, would you really be able to pay that back in only two weeks?

Most payday loan borrowers can’t. That’s why they roll their loan over.

What is Rollover?

With short-term, same-day loans, the practice of rollover is extremely common. It’s basically an agreement between the lender and the borrower: The lender extends the due date on the loan so that the borrower gets more time to repay, BUT the borrower must pay additional interest charges.

Here’s an example of how it might work …

Brian takes out a $300, 14-day payday loan that costs $15 per $100 borrowed, or $45 total. Two weeks later, Brian can’t afford to pay off the $345 he owes. Instead, he pays the $45 he owes in interest and rolls the loan over. He gets an additional two weeks to pay the loan off, but will also have to pay an additional $45. By rolling over the loan once, Brian has effectively doubled the cost of borrowing from 15 percent to 30 percent.

Why is Loan Rollover Dangerous?

Every time a person rolls a loan over, they are increasing their cost of borrowing. Payday and title lenders know this, which is why they often encourage people to roll their loans over as much as possible. Most short-term loans are designed to be repaid in a single, lump-sum payment, which makes them even more difficult to repay.

Loan rollover can all too easily lead borrowers into a debt trap. As they continue to roll their loans over and over again, borrowers do not get any closer towards actually paying the loan off. Each payment they make goes only towards the interest, not the principal loan amount. This arrangement is very profitable for lenders, but it is pretty terrible for borrowers.

Read more about Rollover in our Financial Terms Glossary.

Last week’s entry: Annual Percentage Rate (APR)

Never Payday: An Electoral Guide to Fast Cash Loans

Election 2

The best politicians are the ones that keep their promises and the same is true with fast cash lenders…

Tonight is the final night of the Democratic National Convention, which begs the question … are you sick of the election yet? Fear not, there’s only … oh boy, three whole months to go! What makes election season so difficult to stomach? Maybe it has to do with the unending tough talk, lofty promises, and bombshell revelations. In many ways, it’s not that different from the experience borrowers have when shopping for a fast cash loan.

Lots of lenders make big promises about their fast cash loans, claiming they’re short-term only, reasonably priced, and a cinch to repay. The only problem with these promises is that they’re mostly untrue. They’re like a politician’s stump speech — nice to hear, but how much can you really believe?

To get a better idea of which fast cash loans to avoid and which to trust, why don’t we hold a little election of our own? No superdelegates or caucuses or Gallup polls or any of that, just a straight up-and-down vote. May the best loan win.

Meet the Fast Cash Candidates: The Good, the Bad, and the Title Loans

  • OppLoans Personal Installment Loan: This installment loan loan comes with a larger principal ($1,000 – $4,000), a longer term (6 to 36 months), and a lower interest rate (70 – 125% less than other lenders). The loan is amortizing, which means that it’s paid off in a series of regular, fixed payments.
  • Payday Loans: Payday Loans are small-dollar, unsecured cash loans, with a typical loan amount of $350, an average term of 14 days and standard interest rate of $15 per $100 borrowed … which works out to an annual percentage rate (APR) of 390 percent.[1]
  • Title Loans: These loans are secured by the title to the borrower’s car, truck, or motorcycle. The average loan amount is just shy of $1,000.[2] Title loans are usually one month long, with a monthly interest rate of 25 percent and a 300 percent APR.[3]

The Primary: The Least-Worst Option

Payday and Title Loans both belong to the Predatory Lender Party, while OppLoans is running unopposed as the nominee for the Safe and Reliable Party. Let’s see who OppLoans will be up against in the general election…

The race is a tight one. Payday Loans promises that their fast cash loans are only meant to “bridge the gap” between current expenses and future income. But Title Loans points out that over 80% of payday loans are the result of loan rollover: they’re extensions of previous loans or are taken out immediately following a previous payday loan.[4] Title Loans cites data from the Consumer Financial Protection Bureau (CFPB), stating that the average payday loan customer takes out 10 loans a year![4]

Of course, when it comes to rollover, Title Loans doesn’t have a leg to stand on. According to the CFPB, 80% of title loans are also rolled over from previous loans.[2] In the arena of dangerous and widespread use of loan rollover, it would seem that the candidates are evenly matched.

In the end, it comes down to the fact that one in five title loan customers lose their car when they default on their loan.[2] Although the final vote is close, Payday Loans wins out. And with OppLoans winning its primary east to west, the stage for the general election is now set.

The General Election: A Better Kind of Fast Cash Personal Loan

Payday Loans claim their short repayment terms are superior to OppLoans’ long-term structuring. Why does an annual rate matter when you’re only in debt for two weeks? That argument might work, except the average payday loan customer spends almost 200 days a year in debt![4]

Payday Loans tries to argue that their customers wouldn’t spend so much time in debt if they just paid their loans off on time; in other words, it’s the borrowers’ fault. But study after study, from the Center for Responsible Lending,[5] the Pew Charitable Trusts,[6] and The Kansas City Fed,[7] all show that the opposite is true: payday lenders depend on this predatory debt cycle in order to make a profit. Without frequent repeat borrowers, the payday lending industry would be kaput.

Finally, OppLoans points out that the average payday loan customer can only afford less than $100 towards payments — far, far less than the average of $430 that they owe on their lump-sum repayment.[8] In short: payday loans are difficult to repay by design.

Election Night: The Results Are In!

OppLoans wins in a landslide! Their safe and affordable personal installment loans are clearly the best loan for people in need of fast cash. Folks with bad credit around the country rejoice; no longer do they have have to repay their loans all at once or risk a costly extension. Now borrowers can pay off their fast cash loan over time through a series of regular, fixed payments. (Budgets nationwide also breathe a sigh of relief.) And with customers rating OppLoans 5 out of 5 stars on Lending Tree and Google, it looks like they’re going to be in office for a long, long time.

Vote for more responsible lending by clicking “Apply Online” below!


References

  1. “Payday Loans and Deposit Advance Products.” April 24, 2013. Accessed July 20, 2016. ConsumerFinance.gov
  2. “Single-Payment Vehicle Title Lending.” May, 2016. Accessed July 26, 2016. ConsumerFinance.Gov
  3. Montezemolo, S. “Car-Title Lending.” July, 2013. Accessed July 26, 2016. ResponsibleLending.org
  4. Burke, K., Lanning, J., Leary, J., & Wang, J. “CFPB Data Point: Payday Lending.” March, 2014. Accessed July 26, 2016. ConsumerFinance.org
  5. M Parrish, L. & King, U. “Phantom Demand: Short-term due date generates need for repeat payday loans, accounting for 76% of total volume.” July 9, 2009. Accessed July 26, 2016. ResponsibleLending.org
  6. Bourke, N., Horowitz, A., & Roche, T. “Payday Lending America: Who Borrows, Where They Borrow, and Why.” July, 2012. Accessed July 26, 2016. PewTrusts.org
  7. DeYoung, R., & Phillips, R. “Payday Loan Pricing.” February, 2009. Accessed July 26, 2016. KansasCityFed.org
  8. Bourke, N., Horowitz, A., & Roche, T. “Payday Lending America: How Borrowers Choose and Repay Payday Loans.” February, 2013. Accessed July 26, 2016. PewTrusts.org

The Consumer Financial Protection Bureau Thinks You Deserve Better than a Payday Loan and OppLoans Agrees!

OppLoan supports the Consumer Financial Protection Bureau proposal to end payday debt traps

Borrowers deserve a better product and a better experience than payday loans.

On June 2nd, 2016, the Consumer Financial Protection Bureau (CFPB) proposed strong new rules to protect borrowers from payday, title, and other predatory loans designed to keep borrowers trapped in cycles of debt. Among the rules proposed by the CFPB are “ability-to-repay” protections including: full-payment tests to determine if borrowers are actually able to afford their loans, restrictions on successive loans and rollovers, and limiting repeated debit attempts. OppLoans, an online personal lender servicing subprime borrowers, fully agrees with and supports the CFPB’s proposals because we know that borrowers always deserve better than a payday loan. By offering our customers a safe, affordable alternative to high-cost, high-risk payday and title loans, we are helping borrowers escape the payday debt trap.

Who does this protect?

These new rules are designed to keep all borrowers and their families safe from predatory lenders offering financial products like payday and title loans.

In America, we have more payday loan storefronts than McDonald’s or Starbucks locations. Really. And that doesn’t even include all of the online lenders. Payday lending is a major industry that succeeds by offering borrowers short-term loans that are designed to be difficult to repay. Through deceptive advertising and deliberately unfair terms and interest rates, payday lenders profit at the expense of the borrower. (You can read more about payday lending in our Financial Smarts Glossary here.)

What does this mean?

The CFPB’s proposal includes several major actions meant to end payday loan debt traps:

1. Lenders will have to consider and verify a borrower’s income, total debt, and basic living costs before issuing a loan. They will also be required to check the borrower’s credit report.

2. For short-term loans, lenders will have to verify that the borrower can afford their loan while also paying their major financial obligations and living expenses. This includes the 30 days following final repayment.

3. For longer-term installment loans, lenders will have to verify that the borrower can make their loan payments plus living expenses and major financial obligations throughout the loan’s repayment period. For installment loans that come with balloon payments (a large payment due at the end of the loan’s term) this would extend through the next 30 days following final repayment.

4. Lenders will be restricted from issuing a similar loan to a borrower if that borrower seeks to roll their loan over, or seeks a new loan, within 30 days of paying off their most recent loan. In order for the lender to rollover or issue a new loan, the borrower will have to prove to the lender that it would substantially improve their financial situation. This will apply to both short and long-term loans.

5. For longer-term loans, lenders can only refinance the loan if it means substantially smaller payments or a substantial reduction in the total amount owed.

6. After three loans issued within 30 days of the previous loan’s repayment, there will be a mandatory 30-day cooling-off period.

Simply put, these rules mean that predatory lenders can no longer issue loans to borrowers who obviously won’t be able to repay. The full proposal is available here.

Why we agree

At OppLoans, we strongly agree with the CFPB: Borrowers deserve better than a payday loan.

OppLoans is an online lender servicing the underbanked community. Our customers’ credit scores and histories may not always describe them as prime candidates for traditional bank loans, but we’re a deliberately non-traditional financial services firm. We believe in helping the sub or near-prime borrowers who may be used to being denied loans or credit based on their pasts. These customers have been, historically, targeted by payday lenders. Why? Because predatory lenders know that if a prospective borrower can’t secure a higher credit limit or loan from a traditional bank, they’ll be more likely to accept a payday lender’s unfair rates and terms.

With limited options, these borrowers have been forced into payday loans’ exorbitant interest rates, short terms, and debt-trap designs.

OppLoans offers these borrowers a safe alternative. Unlike payday loans, our personal installment loans come in higher amounts ($1,000—$10,000) for longer terms (up to 36 months). We report payments to credit bureaus to improve customers’ credit scores over time and we never charge pre-payment penalties. Our goal is to evolve the subprime into near-prime or even prime, saving the borrowers’ money and offering them a flat-out better product.

We provide borrowers with a better loan option and our customers agree. We’re proud of our overwhelmingly positive reviews. In fact, our customers rate us an average of 5/5 stars on Google!

OppLoans stands firmly behind the CFPB’s call for stricter regulations on predatory lenders. This proposal will help protect consumers while allowing space for financial innovation to occur. We agree with the CFPB’s efforts to protect consumers from an industry that continues to have a detrimental impact on underbanked Americans. Debt doesn’t only affect the borrower negatively—it restricts their ability to participate in the local economy, causes stress within families, and decreases social mobility.

If you’re struggling financially, or know someone who is, we strongly encourage you to avoid a payday loan. There are better, safer, and more dignified options out there. In the coming months, OppLoans will be rolling out new tools, resources, and products designed to advance our anti-payday mission. We support the CFPB’s call to end the debt traps associated with payday lending and we’ll continue doing everything we can to make better financial tools and products available to anyone who needs them.