High-rate loans made to high-risk individuals are known as payday loans. While these loans can provide a financial safety net, they often cause larger problems over time.
, the state has seen a steady increase in the number of installment loans being taken out by consumers instead. These loans are short-term, like payday loans, but take payments in smaller installments, making them more manageable for borrowers over time.
Pew Charitable Trusts has found these loans to be a less costly and safer alternative to payday loans., Pew found that installment loans take up 5% or less of a borrower’s monthly income, much less than payday loans do, and have significantly smaller origination fees. However, that doesn’t mean installment loans are without risk.
But borrowers should be wary—-and not assume that just because a company is a new fintech it’s offering them a better deal. For example, “early wage apps,” have presented themselves as better alternatives to payday loans, but are now drawing regulatory scrutiny. Earnin, a payday advance app, allows users to withdraw up to $100 per day, against their upcoming paycheck.
—for offering disguised payday loans. Why? The $9 tip which Earnin suggests for a $100 one week loan translates to a 469% APR. Though they aren’t marketed as payday loans, early wage apps come with their own risks and should be used with extreme caution by consumers.
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