Payday lenders are pushing into more states with longer-term installment loans or lines of credit, a shift that is expected to accelerate with the Consumer Financial Protection Bureau's plan to regulate small-dollar loans.
The Pew Charitable Trusts released new data Thursday that shows installment loans are becoming more widespread, with payday and auto title lenders offering longer-term loan products in 26 of the 36 states where they operate. Payday lenders also are seeking to rollback protections in states like New York and Pennsylvania that ban or restrict payday loans.
"Every large payday lender in the market today has already started offering high-cost installment loans," said Nick Bourke, director of the small-dollar loans project at Pew, which has studied and advocated against payday loans for years. "Installment loans need safeguards too."
The CFPB's payday proposal seeks to eliminate some of the worst practices of short-term, small-dollar lenders, including repeatedly rolling over or refinancing loans that trap consumers into cycles of debt.
But consumer advocates have complained that loopholes in the CFPB's plan would allow payday lenders to shift to longer-term loans while still charging triple-digit annual percentage rates.
Bourke identified four practices not addressed by the CFPB's plan that Pew claims are harmful to consumers. They include unaffordable payments that exceed the borrower's ability to repay a loan; front-loaded charges such as large origination fees; longer loan terms of 12 to 16 months; and noncompetitive pricing, which can only be addressed by states.
"States still have a very important role to play here," Bourke said. "The CFPB is going to set a new floor for consumer product safety, but it will not replace the need to regulate state-licensed lenders."
Bourke said the 14 states and Washington, D.C., that ban payday lending need to maintain strict usury rate caps in order to ensure payday lenders cannot enter via another consumer product. States that allow payday loans should consider prohibiting front-loaded charges and maintain or enact research-based price limits, the group said.
Pew recommends that states and the CFPB limit installment loan payments to 5% of a borrower's paycheck and require between 45 days to six months to repay the loan.
The shift by payday lenders to installment loans and lines of credit is not a surprise given that the CFPB has estimated its plan would result in a 60-70% drop in overall payday loan volume.
While the payday lending industry has said borrowers will have nowhere else to turn for emergency cash, the CFPB expects only a 7-11% reduction in the number of borrowers who take out payday loans. That's because under the CFPB's plan lenders would not be able to let borrowers take out multiple loans, which make up a large share of payday loans being originated.
Though both payday and installment loans are offered by some lenders, there are key differences in the annual percentage rates charged and in state licensing requirements.
Payday loans typically are loans of 45 days or less that have to be repaid in one lump sum and typically have APRs of 350% or more. Installment loans have terms longer than 45 days, have equal monthly payments and offer annual percentage rates that range from 36% to 100% or higher.