How to recognize a payday loan disguised as an installment loan
When is an installment loan really a payday loan in disguise? Answer these questions to find out.
Some high-cost lenders avoid the “payday loan” label by offering loans repaid over several months instead of on the borrower’s next payday. The structure may be different, but the cost and risks can be much the same.
Before accepting a loan, check these five things:
1. Look at the APR, not the monthly payment
A payment may appear manageable even when the annual percentage rate is 100%, 160% or more.
The APR combines interest and many fees into a single number, making it the best starting point for comparing loans. Consumer advocates generally view 36% APR as the upper limit for an affordable small-dollar loan.
2. Calculate the total repayment
Ask the lender exactly how much you will repay if you make every payment on schedule.
A $1,000 loan can cost far more than $1,000 once interest and fees are included. The lender should disclose the finance charge, APR, payment schedule and total of payments before you sign.
James R. Hood
3. Watch for repeated refinancing
Some lenders encourage borrowers to replace an existing loan with a new one before the first loan is paid off.
Refinancing may provide a small amount of additional cash, but it can restart the repayment period and add more interest. Borrowers can end up making payments for months while reducing the original balance very little.
Ask:
- How much of the new loan will pay off the old loan?
- How much cash will I actually receive?
- How much more will I pay because of the refinance?
- Will the loan term start over?
4. Be cautious about automatic bank withdrawals
Many online lenders require permission to withdraw payments directly from a checking account.
Automatic payments can make repayment convenient, but they can also trigger overdraft or insufficient-funds fees when money is not available. Multiple collection attempts may create additional charges.
Find out whether you can revoke electronic payment authorization and make payments another way. Revoking the withdrawal authorization does not cancel the debt, but it may help prevent repeated attempts to debit an empty account.
5. Check whether the lender is using a partner bank
The loan documents may name a bank you have never dealt with, even though a separate online company advertised the loan, approved the application and services the account.
That arrangement may allow the lender to charge a rate higher than your state normally permits. Search for the names of both the bank and the company before accepting the loan, and check your state banking regulator or attorney general for complaints or enforcement actions.
Warning signs
Be especially cautious when a lender:
- Emphasizes fast approval rather than affordability
- Advertises “no credit check” or “bad credit welcome”
- Refuses to state the APR prominently
- Focuses only on the payment amount
- Encourages refinancing soon after the loan begins
- Withdraws payments directly from your bank account
- Claims state interest-rate limits do not apply
- Offers a loan that consumes a large share of each paycheck
Before borrowing
Consider alternatives such as a credit-union small-dollar loan, an employer advance, a payment plan with a utility or medical provider, or assistance from a local nonprofit or public agency.
The safest question is not simply, “Can I make the first payment?”
It is: “Can I repay the entire loan on time without borrowing again or falling behind on rent, food, utilities or other essential bills?”
