Why are so many lenders switching from payday to 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.

• 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.