Having the Ability to Borrow Relatively Small Sums, on Reasonable Terms, Can Help Individuals Weather a Financial Shock, Smooth Income Fluctuations, Build a Positive Credit History, and Facilitate a Wealth-Building Purchase
Danielle Fagre Arlowe, Senior Vice President, American Financial Services Association
(Washington, DC, Tuesday, February 2, 2016) – Access to high-quality small-dollar credit is a key component of financial success for many Americans. However, millions of Americans do not have access to small-dollar credit or only have access to high-cost, low-quality small-dollar credit products that too often lead them into a cycle of repeat usage and mounting debt.
Traditional Installment Loans are a time-tested consumer product. They are designed to avoid a cycle of debt by scheduling regular, manageable payments of principal and interest, giving the borrower a clear roadmap out of debt.
Colorado has highly unusual lending laws and regulations that allow a form of payday lending but effectively prohibit public access to the safe and affordable installment loans that have been a reliable source of credit for generations.
Installment loans are a better option than payday loans because they are fully underwritten and repaid in regular payments instead of all at once. Installment lenders also report to credit bureaus, helping borrowers build credit. All over the US, states have looked for ways to deal with problematic payday loans while preserving access to installment loans. It’s about time Colorado’s upside down laws were corrected.
In November 2016 South Dakota voters will be able to decide on Initiated Measure 21, an initiative intended to tackle problems of payday lenders, but which would also affect the Traditional Installment Loans that many rely on as a source of credit.
Should the initiative pass, the consequences for South Dakota would be devastating. It would effectively eradicate small dollar loans within the state by treating safe and affordable loans that have been around for generations, as no different from dangerous loan products. This would leave many families in South Dakota with no way to build a credit history and no credit options to meet emergencies apart from unscrupulous black market lenders.
The benefits consumers need to know about Traditional Installment Loans are:
- Traditional Installment Loans are the oldest form of credit and “plain vanilla”;
- They are fully amortized (payments count toward the principal and interest, every time) and are paid in equal monthly installments;
- There are never balloon payments or pre-payment penalties and payment activities are reported to credit bureaus; and
- They help build credit; traditional installment lenders report to credit bureaus, allowing borrowers to establish creditworthiness or to rehabilitate damaged credit.
Fifteen million consumers used small-dollar credit products in 2012, spending an estimated $41.2 billion on such products. Having the ability to borrow relatively small sums, on reasonable terms, can help individuals weather a financial shock, smooth income fluctuations, build a positive credit history, and facilitate a wealth-building purchase.