Following the raise of eyebrows on payday loans and proposed government regulations that seek to dislodge this debt trap that have caught many citizens , all eyes are now on installment loans to become the new alternative. This move was borne out of government’s intention, through the Consumer Financial Protection Bureau (CFPB) to put an end to costly payday loans extensions and minimize the debts incurred by borrowers. The installment loan model allows for a longer period of repayment and gradual repayment unlike the bulk payment affordable in payday loans.
Why installment is loans the new alternative?
Following proposed regulations by the CFPB that will tighten qualification criteria and make it compulsory for lenders to ascertain the financial ability of borrowers to repay their loans and remove limitations that make it difficult for borrowers to exit the debt cycle, a serious threat to the payday lenders. This move has prompted payday lenders to jump ships. Their motive is to replace the former payday loans with installment loans, in a bid to dodge regulatory sanctions.
The previous years have witnessed a steep rise in amount of money dished out in installment loans, with the amount rising to $24.2 billion in 2015, three times greater than the amount in 2012. The rush is not unconnected to the fact that installment loans minimize the need to apply for loan repayment extension, which normally comes with additional fees or penalties arising from loan default, common with payday loans.
How does the installment model work?
Installment loans are cash advances whose repayment is spread over a long period in manageable and regular installments. Installment models hardly impose financial pressure on the borrower because the money is spread out not to inconvenience of the borrower, allowing him take up some of his regular responsibilities. The installment loans are also targeted at an audience that with less tan favorable credit rating which is needed to access standard bank loans, they also come with high APR’s of about 200% although this is lesser than what is obtainable in payday loans. Also, since installment lenders are regulated and note that they are lending to high risk borrowers, they try to ascertain the borrower’s ability to offset their debt.
Is the installment model safer?
All may seem well with the proposed regulations by the CFPB, which will encourage installment loans but borrowers could be in for more problems if this plans fall through. Already, the installment loan lenders charge a relatively high APR and the higher the interest rate, the longer the principal remains untouched. The longer the term of repayment too, the more amount of money to be repaid even though borrowers may be afforded the luxury of cheaper monthly installment. Therefore in the larger picture, installment loans may turn out to be “payday loans with the of comfort”.
The transition from payday loans to installment loans is gradually gaining grounds, with many persons subscribing to it in recent years. However, there is need for more regulatory restrictions on installment loans before they go the way of payday loans accumulating large amounts in compounded interest. Learn more details at: https://www.unclebuck.co.uk/payday-loans/