Why are so many lenders switching from payday to installment loans?

What are the challenges of offering installment loans?

  • The Finance Charge on the TIL disclosure can look very large.  Usually, this is mitigated if there is no prepayment penalty.  For a simple interest loan, the borrower can pay off at any time.  They pay for the interest that’s accrued up until the payoff date.
  • Complying with Federal Truth In Lending:  Calculating APRs for high interest, multiple installment loans is very complicated.  You want to make sure you’re in compliance.  A fifth grader can calculate a payday loan APR.  This is not the case with installment loans.   
  • Transitioning borrowers from payday to installment can be difficult.  Educating your customers is the solution.  Sell the benefits of offering installment loans.
There are some good reasons to offer installment loans to a payday customers.  Here are a few:
  • Some states make it very difficult to offer payday loans.  Payday loans get a bad wrap.    
  • The payments are more manageable because each payment pays down a portion of principal.  
  • As a small or medium sized lender, it makes sense to offer a product different from the large lenders.  Sure, a lot of them already offer installment loans, but their main product is still payday.
  • Some lenders just do not like using the word “payday” anymore.

How is an installment loan different from a payday loan?  Installment loans can be part of your customer retention strategy.

  • Typically, the loans are larger.  If you reduce principal on an installment loan, halfway through the loan, the receivable balance is around half.  Offering larger dollar amounts is a great way to give your lending operation a competitive advantage.  If you can offer a borrower $800 and your competitor tops out at $400, the borrower will typically go with the larger dollar amount.  Of course, this is risky for first time borrowers, but a great customer retention strategy for borrowers that have paid you in the past.  
  • You can lower the payment amounts by extending the loan out further.  This can make the payments more affordable for your borrow.  
  • From an operational standpoint, you’re not executing an new loan agreement every two weeks.  
  • Typically, installment loans are fully amortizing.  Payday loans work until payday, but many borrowers want more time to repay their loans.  
Need compliance help moving from payday to installment?  Contact Intro XL by clicking  here:

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