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A Message to Congress, Regulators: Installment Loans Work | Commentary

Traditional installment loans are the safest and most affordable way for American families to borrow small dollar amounts.

If members of Congress and regulators like the Consumer Financial Protection Bureau overreach on efforts to rein in perceived abusive lending practices, consumers’ access to this smart lending option could be severely limited. It’s critically important that these unintended consequences don’t happen.

Nearly 10 million households do not have a checking or savings account, and one in five is under-banked, meaning they have difficulty accessing traditional forms of credit, according to a survey by the Federal Deposit Insurance Corporation. And almost 40 percent of Americans find it difficult to meet their basic expense requirements on time each month. These consumers may have limited credit options available, and some — such as payday loans and auto-title loans — carry high interest rates and large balloon payments.

For more than a century, traditional installment loans have offered a better solution by providing consumers access to affordable credit while creating a road map out of debt. Traditional installment lenders work one-on-one with borrowers to determine their ability to repay a loan before making it, and ensure that the proposed monthly payments are affordable. The average monthly payment for an installment loan is $120. Borrowers’ performance on installment loans is reported to the major credit bureaus, making it possible for borrowers to build their credit history. And the fully amortized equal monthly installments make it possible for borrowers to pay off interest and reduce the principal each month.

Unfortunately, this tried and true lending option could be at risk because some regulators are mistakenly lumping installment lenders in with payday and auto title lenders, when the truth is, installment loans couldn’t be more different.

The problem is that many consumers and regulators simply aren’t familiar with installment loans — how they work and can help families build a stable financial future, and what makes them different.

AFSA believes informing consumers about their credit options will empower them to make smarter financial decisions. It is also our hope that by strengthening Americans’ understanding of traditional installment loans, lawmakers and regulators will recognize the need to preserve access to this time-tested lending option.

Real-life consumer stories demonstrate the benefits of traditional installment loans. As one consumer who went from paying more than $720 a month on credit cards and other debts to $290 a month for an installment loan payment said, “This loan offered me peace of mind.”

For all Americans — including the un-banked and under-banked — to share in the economic recovery, everyone must have access to smart lending options. Consumers need to understand the difference between small-dollar loan products that may add to their financial hardship, and traditional installment loans, which can help set them on a path to financial recovery and build wealth for the future.

The new Congress and regulatory agencies such as the Consumer Financial Protection Board also should take note. Any new legislation or regulations to protect consumers must distinguish between traditional installment loans and other, riskier small-dollar lending products. Legislative and regulatory overreach in this area will hurt the very consumers we want to help maintain access to affordable credit.

Bill Himpler is the executive vice president of the American Financial Services Association, the national trade association for the consumer credit industry. For more information in installment loans, visit Want More Stories Like This? Subscribe to our Thought Leaders Newsletter.

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