Report: Installment loans as bad as payday loans

As the federal government clamps down on traditional payday loans, lenders are shifting their businesses to installment loans that can be just as harsh on struggling people, according to a report from the Pew Charitable Trusts.

Pew, a nonprofit public policy research group, is calling on the Consumer Financial Protection Bureau and state governments to prohibit some of the harshest interest rates and fees at a time when the federal agency is considering new rules for short-term loans people take out when desperate for money between paychecks.

Rather than face the federal rules that have been proposed by the consumer bureau, traditional payday lenders and auto title loan lenders are changing their focus to loans that will be paid off over many months. These installment loans differ from traditional payday loans that must be paid off in one lump sum relatively quickly. As the name payday suggests, the idea is that you get a short-term loan and then pay it off when your paycheck arrives.

C o n s u me r a d v o c a t e s have said that the lumpsum payments are often so huge for borrowers to handle, that they continually t ake on new loans to pay off earlier ones and dig themselves into a cycle of debt.

But simply converting to installment loans doesn’t mean individuals will be able to afford them, said Nick B ourke, consumer finance project director for Pew. “They can still have dangerous interest rates and fees.”

For example, he said in many states the fees and interest rates can amount to about a 400 percent annual percentage rate.

Pe w e mphas i z e s t h a t while people have longer to pay off installment loans than the old short-term payday loans, the costs to borrowers remain huge. For example, a payday lender might provide a $500 loan for five months and charge the borrower $595 in fees and interest. Over the five months, the person would pay $219 a month for a total of $1,095.

Payday installment loans and auto title loans need to be re gulated bec ause o f t h e i r u n i q u e s t r u c - t u r e i n c o l l e c t i n g p a y - ments, B ourke s a i d . To get approved for the payday loans, people must give the lender the right to withdraw money directly from a person’s checking account. And auto title loans give the lender the right to take away a c ar if a loan isn’t paid.

Pew wants the consumer bureau and state governments to force lenders to eliminate fees, reduce interest costs and make sure people can afford the loans by limiting monthly payments to 5 percent of a person’s pay. In addition, Pew wants the bureau to put a limit on refinancing payday loans.