A Traditional Installment Loan is a safe and affordable loan product. TIL lenders sit down with their customers and work with them to determine their needs and the size of loan they both need and can afford. In that process, they test the customer’s ability to repay the loan. The loan itself is payable in equal installments of principal and interest. There are no hidden fees, penalties for early re-payment, or balloon payments. TIL lenders work to ensure customers have a clear understanding of their loan and is terms. TILs are reported to the credit bureaus, helping borrowers to build or repair their credit.

TILs often help consumers meet unexpected needs, such the purchase of a new refrigerator, or cover auto repairs or medical or dental bills. 

There are four hallmarks of a safe traditional installment loan.

First, you are working with a reputable, licensed lender who has met with you, understands your needs and has tested your ability to repay and that the monthly payment fits your budget.

Second, the terms are understandable, including a clear description of the total cost of the loan (principal, interest, any fees). The loan should be payable in equal installments of principal and interest, with no balloon payments, or hidden fees. The length of the loan and what is owed each month are just as important as the interest rate for loans that tend to shorter in length. Just as paying minimum monthly payments on a credit card with a large balance can create a cycle of debt, an installment loan for more than you can afford, or one that for a longer term can be unhelpful to a customer.

Third, the lender has explained the risks if the loan can’t be repaid on the original terms, and has policies in place to work with you if something unexpected happens and you can’t make the monthly payments.

Fourth, the lender reports to credit bureaus so that the loan can either help repair your credit or help build it.

Installment lenders have been operating on America’s Main Streets in communities large and small for more than 100 years. Installment credit companies are regulated at the federal, state and local levels, and provide safe and affordable credit to meet the needs of consumers.

There are differences between installment lenders and other “small dollar” lenders, such as “payday” lenders or those that require collateral, such a vehicle titles: accountability. Installment lenders are highly regulated at the federal level and are required to comply with federal laws, such as the Truth in Lending Act (TILA and the Fair Debt Collection Practices Act (FDCPA). Traditional installment lenders are also regulated and audited for compliance at the state level.

Banks offer their customers a few credit options, such a credit cards, but there are costs to offering the most common small dollar loans between $500 and $1500. Given the underwriting costs involved with such loans, banks can’t make much if any profit. As well, there are a number of consumers who don’t have the credit history or even a bank account to take advantage of the types of small dollar credit products banks offer, such as “deposit advance” loans that allow the bank access to a customer’s account. 

Payday lenders rarely if ever work directly with a customer to determine whether or not they can repay their loan. Payday loans tend to be short (perhaps two weeks to a month), and feature requirements for single repayment (principle, interest and fees, such as “balloon payments”).

Pay-day lenders also require access to a source for repayment, perhaps a post-dated check for the full amount owed or access to a borrower’s bank account. So-called “title lenders” require the title of a borrower’s vehicle as collateral.

Finally, these types of loans are not reported to credit bureaus, so do not help borrowers repair or build a credit record. 

Millions of Americans use traditional installment loans. If you have a credit card, that is a form of traditional credit. If you financed the purchase of a new stove or refrigerator that may have been in the form of a traditional installment loan.

A number of surveys have determined that about 40% of all U.S. households don’t have a minimum of $400 in savings to cover emergency expenses, such as auto repairs, replacing a refrigerator or stove, etc. Other surveys have found that more than 30% of all U.S. consumers have less than “prime” credit scores, making it bit more difficult for them to gain credit from some of the traditional sources (credit card companies).

These financial challenges have only been exacerbated by the economic and employment disruption many households have faced during the pandemic. That doesn’t diminish the need to cover those unexpected expenses, so millions of consumers turn to installment lenders for help.

The Consumer Financial Protection Bureau was created by the Dodd-Frank Act of 2010 to police against  “unfair, deceptive, or abusive” practices. The CFPB is supposed to make financial markets work for consumers and responsible providers alike by establishing clear rules of the road and ensuring markets are fair, competitive, and transparent.

The CFPB exists outside of the Constitution’s three branches of government by acquiring, in perpetuity, up to 12 percent of the Federal Reserve’s annual surplus. This makes it exempt from traditional Congressional process of oversight by appropriations. One court, the Fifth Circuit Court ruled that the funding structure is unconstitutional.

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