Installment Loans – What Laws Protect Americans Against Them?

Sadly, not all state laws work in your favor when taking out installment loans. There are so many loopholes lenders can jump through, and APR caps are incredibly high (and sometimes entirely unregulated).

General Overview

Installment loans are less well-known to consumers, and thus, aren't as regulated despite the fact they have a substantial national reach. Currently, there are around 14,000 licensed stores that offer this loan type in 44 states. Alarmingly, the largest provider has more reach than any traditional bank!

According to federal statistics, 12 million borrowers use installment loan lenders every year and tend to take out loans from $100 to over $10,000, which they then pay over $10 billion in fees from these consumer finance companies.

These providers must operate under state laws that regulate the following:

• Loan amount

• Interest rates

• Additional fees

• Finance charges

• Loan terms

However, as we alluded to earlier, statutory rules vary depending on the state. Although it's worth noting that installment loans are generally repayable in 4 to 60 monthly installments. These average around $120 per installmen

How Installment Loans Work

As mentioned, consumer finance companies give installment loans in 44 states to those with poor credit histories. The finance charges vary depending on the state, however, they are all usually higher than traditional banks or credit unions.

According to Titlelo.com, installment loans allow you to borrow a lump sum of money and pay it back over a pre-determined period (typically in monthly installments). There is significant market domination, with 20 lenders owning more than 7,000 of the 14,000 consumer finance stores in the country.

Research shows that Southern states provide less regulation on the additional fees. Thus, their loans cost significantly more than in Northern states. Interestingly, there are more stores per capita in the south as you can see here.

Installment Loan Terms and Conditions

State laws define the terms and conditions of acquiring an installment loan. While they do vary depending on your state, there seems to be a general understanding of how they work.

To acquire a loan from one of these providers, you would start by applying at your nearest branch. From there, you're required to bring your proof of address and identity. Typically, a paystub will be needed to complete the transaction.

You gain approval within 15 to 60 minutes, and the money will be deposited into your bank account by check.

The total cost of the loan (i.e., the interest, fees, payments for ancillary products, and finance payments) is regulated under federal and state, especially the Truth in Lending Act (TILA).

What Is the TILA?

This federal law was enacted in 1968 to protect borrowers who seek money from creditors and lenders. It consists of multiple regulations that were made by the Federal Reserve Board.

The most important parts of the Truth in Lending Act are as follows:

• Disclosure of APR (annual percentage rate)

• Disclosure of loan term

• Disclosure of total costs

Harmful Installment Loan Features

Remember when we mentioned the weaknesses in state and federal law surrounding installment loans? Well, this applies here.

Lenders still provide harmful offerings since there are no regulations to stop them from doing so.

#1 Selling Ancillary Products

First of all, let's take a look at the definition of "ancillary products".

To put it simply, these are additional non-essential "perks" that lenders will tout alongside their loans. This can include insurance policies and other non-insurance products like club memberships.

The lender will advertise them to you in a way that makes them seem useful to you. But in reality, they only benefit the lender.

There should be state or federal laws that stop this from happening because many borrowers have wasted a lot of income on these superficial products.

#2 Origination and Acquisition Fees

These fees are nonrefundable and either come as a flat fee or a percentage of the loan amount.

They are usually calculated once the loan is already issued to you and tagged onto the amount you owe.

While these fees should only be paid once. There are no state regulations that back this up. Because of this, they are typically charged every time you refinance your installment loan.

Not to mention that they expect these to be paid if you choose to pay back the loan early.

#3 No All-In APR Regulation

The all-in APR is the actual amount you pay once all the fees and other costs have been calculated. The problem? It works out to be much higher than the originally stated APR on the contract!

Usually, the all-in APR is 90% for loan amounts of $1,500 or less, and 40% for higher loan amounts. However, loan contracts state only 70% and 29% interest respectively.

While the TILA requires the APR to be stated, this excludes the cost of ancillary products and acquisition fees. This makes it hard for consumers like yourself to accurately compare prices.

#4 Credit Insurance

Installment loan lenders often try to sell credit insurance along with their loans. They state that it covers you if you cannot repay the loan. But this isn't the case.

The insurance adds huge dollar amounts to your loan. Not to mention that the actual amount you're covered for is incredibly low (often it's below the minimum stated by regulators).

State's Installment Loan Lending: Where Do They Stand Now?

While most states follow the federal regulations and thus, have similarly weak lending laws, 2020 saw a few states up their game.

Colorado, New Mexico, Ohio, and California improved their regulations, ensuring APR caps exist for all lenders, and where there were already caps, the states reduced them. Thankfully, these states now have APR maximums of 36% or less for 6-month loan terms.

Unfortunately, the same can't be said for Oklahoma and Iowa. These states increased the APR caps for installment loan lenders, decreasing consumer financial stability.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes