What’s the difference between payday and installment loans?
Payday loans and installment loans (in particular, the type provided by World Finance) are what consumer advocates call ‘small-dollar, high-cost’ loans. They often carry high interest. That is in part because the borrowers are typically low-income, and/or have poor credit or little credit history. Such subprime borrowers may not have access to cheaper forms of consumer credit—such as credit cards or home-equity loans through banks or credit unions.
Payday lending has recently been the target of criticism by consumer advocates and the new Consumer Financial Protection Bureau. Installment lending has flown largely under the radar of public attention and increased regulatory scrutiny. However, as Marketplace and ProPublica found in our joint investigation, some installment loans can have deleterious effects on consumers similar to those of payday loans, dragging those consumers into an ever-deeper cycle of debt.
Here’s the difference between the two kinds of loans:
- Loan amount typically ranges from $100 to $1,500.
- Loan is short-term, to be paid back in full in 30 days or less. Payment is ordinarily due on or immediately after receipt of the borrower’s next paycheck.
- Loan is repaid either through a post-dated check (provided by the borrower at the time the loan is made), or by automatic electronic withdrawal after the borrower’s paycheck has been directly deposited in their bank account.
- Lender charges a fee for the loan that can be calculated as an annual percentage rate (APR). A typical payday loan might be for a principal amount of $100, due in full in two weeks, with a fee of $15. Such a loan would carry an APR of 390 percent.
- Loan is typically unsecured, and the lender assesses the borrower’s ability to repay the loan based on provision to the lender of previous recent paychecks.
- Loan can be, and often is, rolled over in full when due, if the borrower can’t pay it off. The borrower incurs additional fees and owes the original loan amount in another two to four weeks.
Installment Loans (like the type offered by World Finance)
- Loan amount typically ranges from $150 to several thousand dollars. Principal, interest and other finance charges (fees, credit insurance premiums) are repaid in fixed monthly installments—typically over six months to a couple of years.
- Annual percentage rate (APR) ranges from approximately 25 percent to more than 100 percent. According to SEC filings, approximately half of the total funds loaned out by World carry APRs between 50 percent and 100 percent.
- Effective APR on many loans is significantly higher than the stated APR listed on the loan contract, due to the purchase of some types of credit insurance, which the lender is not legally required (under the federal Truth in Lending Act) to include in the APR calculation. In examples cited in our story, we found a stated APR of 90 percent with effective APR of 182 percent on one World loan, and a stated APR of 61 percent with effective APR of 109 percent on a loan from Colonial Finance, a World subsidiary.
- Can be renewed every few months, with new charging of interest, fees, and credit insurance premiums. Renewal is sometimes accompanied by a small ‘payout’ representing some of the principal already paid off in previous monthly installments. The loan amount typically resets to the original amount borrowed, or is increased.
- Loan is typically secured by personal property, excluding real estate. Collateral may include cars, consumer electronics, power tools, firearms and jewelry (excluding wedding rings).
Read other stories from the Marketplace and Propublica joint investigation “Beyond payday loans: Installment lending and the cycle of debt.” Explore the whole series here.
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