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In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Subprime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion. In the process, they’re helping transform the way that a large swathe of the country accesses debt. And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.
To keep up, Americans borrowed. A lot. Unsecured personal loans, as well as mortgage, auto, credit-card and student debt have all steadily climbed over the span. Yet the shift came with a major consequence for borrowers. By changing how customers repaid their debts, subprime lenders were able to partly circumvent growing regulatory efforts intended to prevent families from falling into debt traps built on exorbitant fees and endless renewals.
Larger loans have allowed many installment lenders to charge interest rates well in the triple digits. In many states, Enova’s NetCredit platform offers annual percentage rates between 34% and 155%. The industry, for its part, argues that just as with payday loans, higher interest rates are needed to counter the fact that non-prime consumers are more likely to default.
“By the time they get to be our customers, they may have hit that speed bump at least once; often they will have run into medical bills or a job loss, which knocks out their ability to get other forms of credit,” said Jonathan Walker, who heads Elevate’s Center for the New Middle Class, a research and data gathering unit that analyzes the borrowing habits of the more than 150 million Americans without prime credit scores.