On July 28, the Center for Responsible Lender (CRL) issued a new report regarding the “persistent harms of high-cost installment loans,” claiming that such loans come with an “exploitative cost” in fees and interest that far exceed that amount borrowed, often causing irreparable harm to borrowers.  CRL notes that the high-cost small-dollar loan market has recently seen the rise of high-cost installment loans with atypically longer terms, usually over a period of several months, in contrast to traditional payday loans, which are typically due in a lump sum within fourteen days. 

CRL is concerned about the rise of these longer-term loans because they have characteristics that are similar to those of other payday and car-title loans, including a lack of underwriting, access to a borrower’s bank account or vehicle as security, “structures” that make it difficult for borrowers to repay, excessive rates and fees, and a tendency toward loan-flipping or stressed re-borrowing.  CRL concludes that borrowers cannot afford to repay these loans regardless of whether they are structured as an installment or balloon payment loan.

The data used in the report was collected through an online survey of 1,000 adults who had taken out at least one high-cost personal loan in 2019, 2020, or 2021, with samples of 100 Black adults and 100 Latino adults who took out such loans.  In addition to the survey, CRL conducted two virtual focus groups with borrowers of high-cost installment loans.  To qualify for inclusion in the focus groups, participants were required to have taken out a high-cost installment loan, with terms longer than two months in 2019, 2020, or 2021. 

Among other things, the CRL report includes the following findings:

(1) Unfavorable high-cost installment loan terms led most loans to be refinanced at least once. For the sizable share of borrowers surveyed who missed or made late payments on their loans, the consequences were severe.

(2) The burden of repaying high-cost loans often caused borrowers to miss payments on other obligations, resulting in additional debt or a larger financial deficit—aggravating, rather than alleviating, preexisting financial challenges.

(3) Borrowers understood that these loans hurt their credit scores and delayed wealth-building activities such as purchasing a home or car, investing in a business, or saving for retirement, but circumstances led them to believe they had no other option for meeting short-term financial needs.

The American Financial Services Association (ASFA) responded to the CRL’s report, noting that CRL lumps traditional installment lenders (TILs) and other non-payday and non-car title lenders into a single category identified as “high-cost installment lenders.”  By “deceptively lumping all forms of installment lenders under one umbrella,” ASFA argues that CRL creates confusion both for policymakers and consumers because, despite CRL’s contention that these loans share similar characteristics with other payday and car title loans, that is simply not the case for TILs.  According to AFSA, in contrast to these loans, TIL lenders “underwrite and evaluate customers’ ability to pay; they do not require access to customers’ bank accounts; terms are clear, with standard monthly payments, no hidden fees, no balloon payments or penalties for early repayment, and report to credit bureaus.”

ASFA also notes, contrary to CRL’s contention, that there is plenty of research on the “effects of predatory lending on consumers’ financial standing, and the benefits of responsible small dollar lending for consumers, particularly those with subprime credit scores” and that CRL’s “fallback policy of imposing interest rate caps to protect consumers” is unworkable and will result in the proliferation of the predatory lenders CRL opposes.