A New Pew Report on Installment Loans
Pew Charitable Trusts, an organization founded on religious conviction and oil profits, has published a new report on installment loans, making the argument that state laws are putting the borrowers of these loans at risk.
Pew researchers reviewed state regulatory data, publicly available disclosures, and existing research while conducting four focus groups with users of installment loans and analyzing 296 loan contracts from 14 large installment lenders.
The report finds that there about 14,000 installment lender stores in 44 states that serve 10 million customers each year. Loan amounts range from $100 to $10,000 and are repaid usually in four to 60 monthly installments.
Overall, the report shed a positive light on the industry. It found that installment loans tend to be affordable (as defined by loans that cost the borrower 5 percent of their monthly income) and far less costly than payday or auto title loans. The report also argued that “installment lending can enable both lenders and borrowers to benefit,” something that was already obvious to the millions of borrowers who use installment loans every year.
The author of the report also advocates for four changes to state laws that they argue would improve installment lending:
- Spread costs evenly over the life of the loan;
- Require that credit insurance function like other standard insurance policies;
- Require that the sale of ancillary products be a separate transaction from the issuance of credit; and
- Continue to set maximum allowable charges.
The report also acknowledges that loans with high APR are often a result of the loan’s short duration (“APRs are annualized, so they tend to be higher for loans with shorter terms”) and the fact that a lender’s operating costs – which ends up in the cost of the loan – are fairly constant, regardless of loan size (“lenders’ operating costs…are higher on a per-dollar loaned basis for small loans than for large ones”). Thus, short-term loans will naturally have higher APRs than long-term loans.