Attempting to outrace regulators, the payday lending industry is shifting from lump sum to installment repayments. However, the loans are still fraught with huge hazards for borrowers, the Pew Charitable Trusts said Thursday.

“Most installment payday loans have payments that exceed what typical borrowers can afford,” Pew said in an issue brief. “Unaffordable payments can lead to the same types of problems that exist in the conventional lump sum loan market: Frequent re-borrowing, overdrafts and the need for a cash infusion to retire debt.”

Expanding on the issue brief, a senior officer at Pew said the NCUA's Payday Alternative Loan program avoids many of the pitfalls of payday installment loans, but the program still dwarfs the rest of the industry.

“The revenue and automation have not produced the scale needed to take back credit union members from payday lenders,” Alex Horowitz, a senior officer for Pew's small dollar loan program, said.

He said while 170,000 PAL loans were made in 2014, far more payday loans – 100 million – were made that year.

Pew said regulators should adopt regulations that encourage more banks and credit unions to offer alternatives to the loans offered by many payday lenders.

Through its PAL program, the NCUA permits federal credit unions to charge an interest rate of 1,000 basis points above the maximum interest rate established by the NCUA board and an application fee of no more than $20. The loan must be structured with a term of 46 days to six months, and include substantially equal and amortizing payment due dates at regular intervals. No prepayment penalties are allowed. Under the program, the minimum loan size is $200 and the maximum loan size is $1,000.

The CFPB issued proposed rules in June to regulate payday loans; those rules would require loans to be repaid in installments. Credit unions had been pressing for a total exemption from those rules.

The CFPB refused to do that. However, the proposed rules do include an exemption for the PAL program.

For most borrowers to be able to repay the loans, they should not be required to make payments totaling more than 5% of their income, Pew said.

Finance fees should be spread out over the length of the loan and the duration of the loan should be sufficient to allow repayment of the loan.

And while the CFPB does not have the power to set a loan interest rate, state regulators should do that, it noted. Regulators should also drive down loan prices to allow more traditional lenders to enter the market, Pew said.

“Banks and credit unions have large competitive advantages over payday and auto title lenders because they are diversified businesses that cover their overhead by selling other products, could lend to their own customers rather than paying to attract new ones, have customers who make regular deposits in their checking accounts and have a low cost of funds,” Pew said.

As a result, those financial institutions are likely to be able to offer loans at prices that are six to eight times lower than other payday lenders, according to Pew.

These financial institutions could profitably make small loans at double-digit APRs, for prices that are six to eight times lower than those offered by payday lenders, Pew said.

However, Pew also said underwriting that requires staff time or a great deal of documentation would make the loans too expensive for banks and credit unions to offer.

Instant Insights /

Payday Lenders Shift to Installment Loans

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