The Disadvantages of Installment Debt

An installment loan is one that you pay back in equal payments each month. Every payment includes partial repayment of the principle, with the rest going toward interest. Traditional installment loans such as car payments and mortgages that you pay on time each month can help improve your credit record. Small loans made through installment agreements, however, can get you into serious financial difficulties.

When you approach an installmen-loan lender about a small loan, look at the total amount of money you would repay after you make the monthly installments. Time magazine reported on a loan that was made to a woman for $207 she needed to fix her car. After paying seven installment payments of $50 each, she ended up paying $350 for the small loan, a 90 percent annual percentage rate.

Small installment-loan lenders rely on consumers who can’t make their monthly payments because most of their customers are considered sub-prime. In other words, they don’t have very good credit, at least not good enough to have a low-interest credit card to help when they need it. For example, World Acceptance Corp., one of the country’s biggest installment debt lenders, told Time magazine that about 77 percent of its business came from refinancing. The company makes it really easy to keep you indebted by offering easy extensions.

In many states, the creditors heavily push insurance products they say will cover your loan payments in case you die or become disabled. The company receives a commission from the insurance company for every policy it sells and charges you more interest on the insurance, which is rolled into your loan. The salespeople are trained to sell these lucrative insurance products and may even use pressure to persuade you to buy a policy. They don’t have to include the insurance in the APR advertised even though it becomes part of your repayment.

Small installment-loan lenders use aggressive techniques when it comes to collecting. In fact, according to public journalism site ProPublica, they might even start calling you before your due date each month if you are habitually late. After repeated calls to your home don’t result in payment, they start calling you at work and then begin harassing your friends and neighbors. Collectors show up at your house or your job when you refuse to answer their calls and may threaten to take your possessions. When you get a visit from a collector, you are usually offered more money if you renew the loan, putting you deeper into debt. And the cycle continues.