Installment Loans Gain Attention for High Interest Rates
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UPDATED: May 13, 2013
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Consumers have more to worry about than high-interest, short-term loans. According to a new report from ProPublica, long-term installment loans carry similar interest charges to payday loans and trap borrowers in the same cycles of debt.
Installment loans, which have existed for decades, allow borrowers to pay back their loans over several months or years. The lenders make their money by tacking on unnecessary insurance fees and by enticing borrowers to renew their loans.
ProPublica interviewed Katrina Sutton, a Georgia native whose wages were garnished after she failed to repay her installment loan. Sutton borrowed $207 and paid $76 in insurance premiums to guarantee her loan in the event that she died, became disabled or totaled her car (which she had offered as collateral) before paying back the loan.
What was originally meant to be a short-term loan with seven monthly payments of $50 turned into a nightmare. After making three payments, Sutton’s lender, World Finance, allowed her to “refinance” her loan, which essentially reset the term. In return, Sutton received a small portion of what she had paid towards the original loan, $44 out of $150 in payments.
After seven months, when Sutton should have paid off her loan, she still owed $390 to World, after making $300 in payments. Nearly 75 percent of World’s loans are renewals.
When borrowers fail to repay their loans, World calls the borrowers, as well as the seven friends and family members listed as references on the loan application. If the borrower avoids World’s calls, representatives of the company have been known to visit a borrower’s home and place of work.
World’s final course of action to recoup delinquent loans is to sue the borrower and garnish their wages. The company operates in at least 19 states and 11 of them, including Sutton’s home state of Georgia, allow lenders to garnish a borrower’s wages. After World put a hold on her paycheck, Sutton reached out to Georgia Legal Services Program (GLSP).
According to experts, one of the easiest ways to make a bad financial situation worse is to use debt to counteract debt like Sutton did. In a statement to loans.org, Andrew K. Johnson of GreenPath Debt Solutions advised borrowers to avoid taking out new loans to pay for old loans.
“Too often, we hear of individuals who can’t pay their loan in the allotted time, so they open another loan to cover the first,” Johnson said. “As the interest rates pile up, often they open a third to cover the second which is covering the first.”
Johnson also recommended that struggling borrowers find non-profit credit counseling agencies, such as the GLSP, through the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
“Members of these groups provide free credit counseling and can provide advice in paying off such loans,” Jackson said.