Payday installment loans have oftentimes been associated with debt. This is due to the high interest rates and expensive fees most lenders charge their consumers. Because of this, many consumers of these loans have trouble getting out of debt, especially those who are tied up with the loan due to defaults and renewals.
So what are the common problems associated with payday installment loans that cause many consumers get drowned in debt? Here is the list of them:
1. Payday installment loans are not used on a one-time basis as originally designed. Reports have revealed that the costs associated with the loan are unaffordable and cannot be easily repaid in a single payment. This is the reason why many consumers default or opt for rolling over the loan. Thus, most consumers end up paying more in fees than what they originally borrowed which puts them in worse financial shape than before they started borrowing.
2. The costs associated with the loan are too high, especially for those consumers with a high default risk. Lenders of payday installment loans claim that the expensive costs of their loan is due to the high risk they are taking when lending money. Payday installment loans are unsecured loans that do not require collateral to secure the borrowed money.
3. Payday installment loan lending, especially online lenders, is unregulated in some states, such as California. This is why consumers are concerned. These loans are good for those states that have regulations but for those states where payday installment loans are poorly regulated, consumers are at high risk of abusive lending practices and are more vulnerable of falling into the debt trap.
4. Despite dissemination of information on responsible borrowing, consumers can still be easily deceived by lenders of payday installment loans because most offers of lenders are inherently deceptive to attract consumers. By just simply requiring consumers to write a postdated check to guarantee the loan, they use this as an indirect and subtle way of coercion and harassment. For example, they will threaten the consumer of being put into jail for passing a bad check, even if the law specifically states that consumers cannot be prosecuted for bouncing checks. Also, lenders promise low interest rates on loans but charge expensive processing and late payment fees. These are some of the deceptions that many consumers still fall into.
In response to these problems, the federal government has prompted legal action by publicized Senate Bill 834 which is based on a model bill drafted by the national consumer groups (Consumer Federation of America and the National Consumer Law Center). The bill provides the following major provisions:
1. Reduction of the allowable fees for payday installment loans. The allowed charges would be a $5 “set-up” fee, and a maximum interest rate of 36% per year (or 3% per month or 1.5% for two weeks).
2. Setting a minimum number for rolling over loans.
3. Stronger regulations concerning harassment of lenders when consumers write a bad check.
4. Civil penalties of $2,000 per violation of the law, as well as actual damages and punitive damages for intentional violations.
5. Stronger regulations by the Department of Justice on licensing, record-keeping, and reporting of lenders.
As always, problems with payday installment loans can be better addressed if consumers are informed of their rights and practice a sense of responsibility in dealing with their loans.