Installment loans not the answer to financial hardship

Many Oklahomans are in a financial crunch right now. The pandemic has taken an economic toll on households across that state, which we see clearly in the most recent Census Household Pulse Survey. The survey shows that many of our friends and neighbors have lost a job or income during the pandemic. More than 3 in 10 households say they have missed a mortgage or rent payment or are unsure they can make their next payment. These families are experiencing real financial distress and some may look to quick consumer loans to help bridge the gap.

Changes taking effect this month in Oklahoma will offer higher dollar loans, but at a significant long-term cost. Starting August 1, 2020, payday loans (short term loans of $500 or less) can no longer be issued. Instead, these lenders can now offer longer-term loans in higher dollar amounts — up to $1,500 with terms of up to 12 months. Oklahoma consumers should be aware of the potential dangers of these new installment loans. Just like the payday loans they replace, they are designed to trap borrowers in long-term debt.

Installment loans carry very high interest rates

Consumer lenders can now offer installment loans of up to $1,500 dollars to Oklahoma borrowers. These loans are paid back in equal monthly payments and carry a very high interest. The law that created these loans in Oklahoma allows lenders to charge 17 percent interest each month, which amounts to an annual percentage rate of 204 percent. The primary reason that these loans are problematic is that those equal payments disguise the amount of interest that borrowers are really paying. A borrower who takes out a $750 installment loan for a term of six months will pay $503.77 in interest. A $1,000 loan paid back over 12 months will carry $1,405.59 interest. The maximum loan amount of $1,500 will cost $2,108.38 in interest for a 12-month loan. With such a high interest rate, installment loan borrowers can easily end up paying more in interest than they actually borrowed, and this creates further financial hardship. 

These loans are unaffordable for low-income borrowers

In phasing out the availability of payday loans and replacing them with installment loans, policymakers were attempting to offer more affordable short-term loans with better terms to borrowers. Unfortunately, there are not many protections for borrowers with these new installment loans. Lenders must make sure that monthly payments do not exceed 20 percent of the borrower’s gross income (before taxes and deductions), but this is an inadequate protection. A couple with income at the poverty line ($17,240 per year) could be approved for a payment of up to $287 per month that would have to come out of their $1,297 each month in take home pay. 

That leaves just over $1,000 for rent, utilities, food, transportation, and other basic needs, and it will not be enough. For example, fair market rent for a one-bedroom apartment in Oklahoma is $578, and the U.S. Department of Agriculture estimates that a couple needs at least $385 per month for food. After housing, food and loan costs are taken out of their monthly income, the borrowers would be left with just $57 to pay for utilities, transportation, medical costs, or any other everyday expense. If a borrower cannot pay back the loan, they can be declared in default as soon as one day after their first missed payment. The authorizing legislation also allows lenders to request that the borrower’s wages be garnished for repayment, making it even more difficult to meet basic needs.

Installment loans are dangerous, and low-income Oklahomans will be most likely to pay the price

Middle- to high-income Oklahomans are likely to have access to more affordable sources of credit, such as bank loans and credit cards, should they experience temporary financial setbacks. Low-income Oklahomans are less likely to have an established credit history, making these more affordable options unavailable to them. So those who are least likely to be able to afford these high-interest loans will be the target customers for installment lenders. This has the potential for economic disaster. Installment loans are dangerous financial products, and they don’t provide real help for struggling families.

We can and must do better to help families struggling through the current economic crisis. Oklahoma received $1.2 billion from the Coronavirus Aid, Relief, and Economic Security Act to spend on coronavirus relief, and more of that funding needs to go directly to families impacted by the pandemic so they don’t have to rely on potentially harmful short-term, high-interest loans. The federal government could also help by making additional financial relief available directly to families in the next relief package.


Courtney Cullison worked for OK Policy from 2017 to 2020 as a policy analyst focused on issues of economic opportunity and financial security. Before coming to OK Policy, Courtney worked in higher education, holding faculty positions at the University of Texas at Tyler and at Connors State College in eastern Oklahoma. A native Oklahoman, she received an Honors B.A. in Political Science from Oklahoma State University, and an M.A. and Ph.D. with emphasis in congressional politics and public policy from the University of Oklahoma. While at OU, Courtney was a fellow at the Carl Albert Congressional Research and Studies Center. As a professor she taught classes in American politics, public policy, and research methods and conducted original research with a focus on the relationship between representatives and the constituents they serve.

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