CHICAGO–A new type of “onerous” loan targeting working class Americans is being heavily promoted by subprime lenders, according to one new report.
“It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates,” reported Bloomberg in its analysis. “If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.”
According to a new report from TransUnion, in just five years, online installment loans have gone from being a relatively niche offering to a “red-hot industry.” Bloomberg noted the data show subprime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion.
A ‘Cash Cow’
“Installment loans are a cash cow for creditors, but a devastating cost to borrowers,” Margot Saunders, senior counsel for the National Consumer Law Center, told Bloomberg.
Bloomberg said in its analysis that for many families struggling with rising costs and stagnant wages, the high-cost installment loans is a “cost they’re increasingly willing to bear,” in part because while the average household incomes for those with a high school diploma have risen about 15%, to $46,000 annually by 2018, there has been a 20% increase in costs, while home prices are up 26%, medical care 33%, and college costs a whopping 45%.
Payday lenders “saw the writing on the wall, and figured, ‘let’s anticipate this and figure out how to stay in business,’” Lisa Servon, a University of Pennsylvania professor specializing in urban poverty and author of “The Unbanking of America: How the New Middle Class Survives,” told Bloomberg.
Triple-Digit Rates
Online installment loans target near-prime’ borrowers and range from $100 to $10,000 or more.
“Yet the shift came with a major consequence for borrowers. By changing how customers repaid their debts, subprime lenders were able to partly circumvent growing regulatory efforts intended to prevent families from falling into debt traps built on exorbitant fees and endless renewals,” Bloomberg stated. “Whereas payday loans are typically paid back in one lump sum and in a matter of weeks, terms on installment loans can range anywhere from four to 60 months, ostensibly allowing borrowers to take on larger amounts of personal debt.
For instance, Bloomberg reported subprime lender Enova International said its outstanding installment loans averaged $2,123 in the second quarter, versus $420 for short-term products, according to a recent regulatory filing.
Triple-Digit Rates
“Larger loans have allowed many installment lenders to charge interest rates well in the triple digits. In many states, Enova’s NetCredit platform offers annual percentage rates between 34% and 155%,” Bloomberg said.
The lenders have responded by saying that just as with payday loans, higher interest rates are needed to counter the fact that non-prime consumers are more likely to default, Bloomberg said.
“Between Enova and rival online lender Elevate Credit Inc., write-offs for installment loans in the first half of the year averaged about 12% of the total outstanding, well above the 3.6% of the credit card industry,” Bloomberg said.
Surge in Business
The Bloomberg analysis found Elevate’s annual revenue rose about 1,000% in the five years through December to $787 million, while Enova has seen growth of 46% in the span to $1.1 billion.