Installment Loans vs Payday Loans. What’s the Difference?
I get at least one call every day along the lines of, “What’s the difference between a payday loan and an installment loan.”
They say a picture is worth a thousand words so here you go.
Typical Installment Loan Breakout from Page 248 of our “How to Start a Personal Loan Business:”
Consumers borrow between $300 and $1,200.
The standard repayment schedule for installment loans offered is 20 payments over the course of 10 months, with one payment made every two weeks.
For each installment payment, a consumer must pay a “service fee” (often $30 for every $100 of principal outstanding) and five percent of the original principal.
As a result, lenders typically offer loans with annual percentage rates of between approximately 440% and 950%.
For an $800 loan, a typical loan contract requires the consumer to repay a total of approximately $3,320 over the course of ten months.
The following excerpt is from a typical loan document prepared for an installment loan in the amount of $800 originated by a lender and made to a borrower:
NOTE: For an in depth discussion and sample docs and contracts, visit PaydayLoanUniversity
Insight & Wisdom in small dollar lending. Digging down below the media headlines… Continued
How & Why PDL and Title Lenders Must Embrace the Internet.
Does your Team want to enter the lending space w/o the hassle of state-by-state licensing, bonding and compliance issues? “Tribe-in-a-Box” available immediately. Includes a sophisticated, well-funded tribe, ACH, push to credit card, LWS, website… Reach out to Jer@PaydayLoanIndustryBlog.com or 702-208-6736 for details. Borrowers by the millions are out there…
It’s a fact! Every day, tens of thousands of consumers are using the Internet and their phone to find a local brick-n-mortar or to apply online for a loan.
Borrowers do it from home, from work and from the library. They do it from virtually everywhere in the world including the USA, the UK, Canada, Australia, Korea, Japan, Ireland, New Zealand, the Bahamas and more.
They apply for cash advances and personal loans from states not having favorable payday loan laws such as Georgia, North Carolina, New York, PA, NJ, AZ, KY and Oregon. And, they apply from states and provinces having safe-harbor legislation like Texas, Louisiana, Mississippi, Ohio, Illinois, California, Nevada, Florida, etc.
Is it advisable for you to fund loans to residents in states and provinces lacking safe-harbor legislation? Of course, the answer depends on your business model but expect significant grief from the CFPB – assuming it still exists, State AG’s, compliance expenditures, ACH processing and bank challenges… if you choose to. Even tribes must deal with the FED’s.)
We have clients receiving tens of thousands of installment and cash advance applications every week via the Internet. Typically they fund 15% to 40% of these depending on their underwriting criteria.
And let’s not forget CashNetUSA – now called Enova. You remember! An Internet based payday loan company started in 2004; purchased for $35,000,000 in 2007 by Cash America, a brick-n-mortar player. Then spun-off and an IPO succeeded…
Did you know Advance America launched in the UK 30 days later? On the Internet? Using the CashNetUSA software platform? Unreal! With the aid of the Internet they were able to literally “flip-a-switch” and offer their cash advance product to an entire country!
Now you’re probably wondering how those of you with stores could possibly care about this situation. The fact is, the Internet guys are taking market share from you. Our target demographic is 25 to 50 years of age. Every day our customer base is eroding. It may be a trickle now but it is a certainty if you’re not using the Internet to service your customer base you are not going to reach your potential.
The Internet offers you the ability to provide your small dollar loan product to your entire state/province rather than the 5 mile, 8 mile, 10 mile radius around your brick-n-mortar!
You’re licensed in your state! Why not service your entire state?
By the way. How does your web site look on a smart phone? Whip out your phone and pull up your website. Does it look like CR@#$%P? You better fix this! Type PaydayLoanUniversity.com on your smartphone browser for an example.
Sure, there are challenges. Marketing to a customer base throughout your state/province is a different animal.
Yeah, your team will need to become acquainted with search engine tactics. And how do collect from a client 500 miles away? Hint: sub-prime data scrubbers; CoreLogic, Clarity, DataX… [For their contact info: Resources
I know what you’re thinking. “I’ll need a web site and Internet based payday, installment or title loan software.” Yes, you will need to address those issues. If you attended the last CFSA convention, you know these challenges are not insurmountable. And, if you’ve studied our “How to Make by Money Lending Money: Bible” you already have the answers!
The next issue of Cheklist (sic) Magazine and Currents Magazine will probably provide some answers as well. You do subscribe to Cheklist? And Currents?
Of course you’ve visited Craigs List? The free Internet based bulletin board? We place a free ad in each city we have a personal loan store located in. We average 2-5 funded payday loan applications each and every day from Craigs List depending on the size of the city!
We all know the life-time value of a payday loan customer. $1,200? $2,000? $4500? Higher? That’s pretty good for zero cost!
We’ll cover more of this topic in a future Small Dollar Loan Newsletter.
For now, start thinking about this opportunity. Get up to date.
This topic is not over. We are just getting started.
Comment? Questions? jer@PaydayLoanIndusytryBlog.com 702-208-6736
APR Calculator & Fees for Installment and Payday Loans
APR Formula: [Note: Click LINK below to download a PDF of this Formula.]
100 X 365/D X (C/L -1) =APR
Where: D = number of days of loan
C = total cost of loan
L = amount of loan
Typical Payday Loan example:
Client borrows $100 for 2 weeks (14 days) with a fee of $17.
100 X 365/14 X (117/100 – 1) = APR
2607.14 X .17 = 443.21 % APR Total cost to client = $117.00
Another scenario. Client borrows $100 for 2 weeks (14 days) with a fee of $75.
100 X 365/14 X (175/100 – 1) = APR
2607.14 X .75 = 1,955.35 % APR Total cost to client = $175.00
Typical Bank Overdraft example (NSF’s amount to short term, single payment payday loans:
If a bank customer overdrafts their account by $100 they can be charged a $35+ Overdraft [NSF] fee for the first day. An Extended Overdrawn fee of $35 on the sixth day.
100 X 365/6 X (170/100 – 1) = APR
6083.33 X .70 = 4,258.33 % APR Total cost to client = $175.00
If that same overdraft is for only $10 (some bank’s minimum):
100 X 365/6 X (80/10 – 1) = APR
6083.33 X 7.0 = 42,583.31 % APR
Total cost to client = $80.00
According to PEW, when the state of Georgia outlawed payday loans the banks netted 1.4 billion dollars more in overdraft fees the next year.
Typical Late Fee example:
Using a common Water District bill as an example. If a financially strapped consumer is one day late paying their water bill of $17.59 a $5 fee is charged.
100 X 365/1 X (22.59/17.59 – 1) = APR
36500 X .28 = 10,220.00 % APR
Total cost to client = $22.59
So… Why do banks and credit unions “HATE” payday loan and installment loan lenders? Because payday loans are cheper for the consumer in a short-term financial pinch AND the majority of bank and credit union profits are derived from the NSF fees thaey charge their customers!
“In all, the CFPB found that 60 banks derived a significantly higher portion of their overall recurring earnings from consumer overdraft and NSF fees than their peer institutions.”
“Additionally, the fees represented 65.3% of all reported consumer deposit account fee revenues.”
What’s the answer to all this controversy for an entrepreneur? Grab a copy of our “Payday Loan/Installment Loan Manual” [updated 2X per year] and learn how to make money by lending money!
You don’t really want to open a pizza parlor, a florist shop, another taco stand… do you? In the small dollar lending space, your inventory is MONEY! Money does not rot, die, or get thrown in the garbage at the end of the day.
Link to download a PDF of this calculator.
Texas CAB and Texas CSO- How to Start a Texas or Ohio CSO – CAB lending Company
How Texas and Ohio Installment loan lenders and Payday loan Lenders Use CAB’s and CSO’s – Credit Access Businesses – to
Increase Their APR’s above the lower mandated small dollar loan caps.
The Texas Constitution mandates a 10 % cap on the amount of interest that can be charged on personal loans.
But, via a perfectly legal entity called a CAB – CSO, Texas and Ohio lenders can charge much higher interest rates; 400% to 800% and higher APR’s are not unusual.
And Texas accounts for roughly 54% of the U.S. annual profits delivered to the payday and auto title industries; California is a close second.
How is this possible? CAB’s and CSO’s. Lawful entities backed up by years of legislation and regulation by both Texas and Ohio
Texas and Ohio lenders incorporate their brick-n-mortars and their Internet loan platforms as separate entities that collect 10% interest on behalf of a 3rd party lender and then are allowed to charge additional fees fees and interest for the services that they provide by referring consumers to the lender and servicing the loan.
Typically, these CAB’s and CSO’s charge the borrower for marketing, underwriting and servicing the loan on behalf this “lender.”
In Texas and Ohio, payday and auto title lenders register as a Credit Services Organization (CSO) Credit Access Businesses (CAB).
Texas and Ohio do not limit fees, interest rates, loan amount size, or refinances and do not require the CAB to assess ability to repay based upon the consumer’s income; at least not at the time of this writing. The CFPB has much to say about this situation.
Accordingly, for single payment products, CAB’s/CSO’s typically charge an “origination fee” ranging from $22 to $30 per $100 borrowed and, if the borrower is unable to repay the loan by the due date, a “refinance fee” that is usually identical to the amount charged as an origination fee.
Again, because of the CSO/CAB 3rd party lender model, CAB’s/CSO’s also charge consumers an additional 10 % annual interest rate while the loan is in repayment on the lender’s behalf. Most CAB’s share late fees and application fees with the 3rd party lender as well. Thus, it’s not uncommon for a “lender” in this 3rd party arrangement to achieve a 12% – 18% ROI on their money.
Per The Texas OCCC, Texas CSO’s/CAB’s grossed approx. $930 for a $325 consumer loan. Borrowers averaged several thousand dollars in fees for a $1000 car title loan.
You want to learn how to start a Texas or Ohio CAB/CSO and begin making money by lending money? Invest in our “How to Start a Payday Loan/Installment Loan Manual.” Click HERE to begin.
Those who compete against payday loan, car title loan and installment lenders – banks, credit unions, pawn shops… always refer to payday loan APR’s as “outrageous!” And yet, a cursory review of this “APR Bank vs Payday Loan Comparison Chart” below, clearly refutes the validity of this claim.
The following chart is based upon an independent study performed by Dr. Dan Oglevee and Dr. Bill Reeves, finance professors at The Ohio State University. It compares the actual and annualized interest rates for a variety of short-term loans and banking and credit services.
Need help with starting your payday loan company? Start here: “How to Start a Payday Loan-Installment Loan Company.”