Last week, the Baltimore Sun ran an opinion piece that inaccurately conflated payday lenders with traditional installment lenders. While we appreciate the authors’ concern with consumer protection, the focus should be on arming consumers with facts that allow them to make fully informed decisions about their finances.
There is a real difference between payday loans and standard traditional installment loans, including clear and equal monthly payments, no balloon or prepayment penalties and the opportunity to build credit.
For installment loans, interest rate is not necessarily the best indicator of the true cost of the loan.
In short — Let’s say you borrow $100 and you only must repay $101. If you repay that loan in one year, 365 days from when you took it out, the annual percentage rate (APR) will be just one percent. If you repay it in one month, the APR is 12 percent. One week? 52 percent. If you pay the loan back the day after you take it out? The rate is what appears to be a massive 365 percent. If you repay that $100 loan with $1 of interest an hour after you take it out, you’ll be paying a whopping 8,760 percent APR.
For traditional installment loans, which do not include hidden fees or repayment penalties, the determining factors in a consumer’s decision-making are generally the length of the loan, as well as the fixed monthly payment amount.
Yes, protect consumers, but don’t hinder their access to choice when they need financial help.
An abridged version of this article appeared on BaltimoreSun.com on September 8, 2020.
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