Installment Loans

Posted by on Oct 3, 2011 in Alternatives

Installment Loans

Many online lenders now offer unsecured, short-term installment loans to borrowers with bad credit. They are yet another payday loan alternative that, in some cases, can offer cash loans to residents of states that prohibit payday lending.

Compared to payday loans, these installment loans have a longer term and higher number of smaller payments. This means a lower APR for the loan but higher overall cost. Compared to other forms of credit (like personal loans from credit unions), these installment loans are expensive and should only be used for emergency situations.

Let’s take a look at the advantages and disadvantages of installment loans, what they are and why there are so many of them now…

What is an installment loan?

An installment loan is a loan that is repaid over time and has a fixed number of scheduled payments (installments) agreed upon before the loan is made. It can have a fixed or variable interest rate and terms can range from a few months to several decades. The most common installment loan is a mortgage.

Why do so many online lenders now offer unsecured, short-term installment loans to people with bad credit ratings?

As we learned in our article Six Payday Loan Laws that Hurt Consumers, many states impose draconian laws that single out payday lenders:

  • moratoriums on new payday loan stores
  • distance requirements
  • borrower databases
  • discriminatory business tax increases
  • rate caps
  • prohibition (extreme rate caps, bans on single-payment loans, etc.)

These laws restrict or kill the cash loan supply but do nothing to address or alleviate the demand for such services. For some lenders, installment loans are a way to supply public demand while avoiding laws that specifically target payday lenders.

Another factor is the rise of tribal lending entities. These entities are wholly owned by Native American tribes, sovereign nations located within the United States of America. They operate within the boundaries of reservations and they don’t have to recognize any lending laws outside of the tribe. This allows them to be more flexible with interest rates and terms.

Advantages of installment loans include:

  • lower APR than payday loans (400-450% APR as opposed to over 600% APR)
  • lump sum not due on your next payday (broken into small bi-weekly or monthly payments)
  • all payments are scheduled in advance (easier to budget for – no surprises)
  • not open-ended credit like credit cards
  • no extra charges as long as you make all scheduled payments on time
  • no arbitrary rate increases by universal default like credit cards
  • quicker loan approval process compared to traditional lenders
  • some installment lenders offer lower interest rates for repeat borrowers

Disadvantages of installment loans include:

  • expensive credit (higher APR and more expensive than some other alternatives)
  • overall cost may be higher than payday loan
  • longer-term impact on household budget/finances
  • penalties for missing scheduled payments

Whenever possible, it’s better to avoid loans of any kind. If you have no other options, be sure to use these for short-term, one-time emergencies only. Like payday loans, they should never be used for luxuries or long-term financial problems.

If you can think of any other advantages/disadvantages of installment loans or would like to share your thoughts regarding tribal lending entities, please contact us.

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