The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse.
Online Installment Loans – And yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit.
It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.
In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion. In the process, they’re helping transform the way that a large swathe of the country accesses debt. And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.
Booming Business – Online Installment Loans
The surging popularity of online installment loans, combined with a growing ability to tap into big data to better screen customers, has helped boost the fortunes of many subprime lenders. The Trump administration’s decision earlier this year to delay and potentially weaken planned restrictions on payday lending that were announced in 2016 has also bolstered the industry’s outlook.
Elevate’s annual revenue rose about 1,000% in the five years through December to $787 million, while Enova has seen growth of 46% in the span to $1.1 billion, according to data compiled by Bloomberg.
Subprime installment loans are now being bundled into securities for sale to bond investors, providing issuers an even lower cost of capital and expanded investor base. Earlier this month Enova priced its second-ever term securitization backed by NetCredit loans. The deal paid buyers yields between 4% and 7.75%. Its debut asset-backed security issued a year ago contained loans with annual interest rates as high as 100%.
- Many of the same subprime lenders who specialized in payday loans are now turning to online installment loans, which have longer maturities and high interest rates.
- This time lenders, such as Enova International (ENVA) and Elevate Credit (ELVT +0.2%), are appealing to working-class borrowers rather than the country’s poor.
- Subprime borrowers now owe about $50B on installment products, according to credit reporting company TransUnion.
- Regulations aimed at payday loans, which are generally small, short-term loans, may not apply to the online installment loans, which can range to $10,000 or more.
- Some states like California and Virginia capped interest rates on loans below $2,500 in an effort to protect payday borrowers.
- Subprime lender Enova’s outstanding installment loans, though, averaged $2,123 in Q2 vs. $420 for short-term loans, according to a filing.
- The lenders say they need to charge higher interest to offset the higher default rate of non-prime borrowers.
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Online Installment Loans