The Pew Center issued a new report on small-dollar loans last week. The report's findings describe how non-bank lenders issue installment credit to subprime consumers. Pew reviewed PACER filings for 296 contracts made by fourteen lenders.
All-in APRs are higher, sometimes much higher, than the stated APR. An all-in APR used statutorily for the supervision of loans originated to service members under the Military Lending Act, covers all of the costs associated with financing a loan. When the price of insuring the loans studied by Pew was factored into an all-in-APR, the average cost jumped well beyond 40 percent. In its research, Pew found that an all-in APR was higher and that with loans of smaller size, the all-in-APR often ended up closer to 90 percent.
Installment loans often came with ancillary products. In the great majority of the loans in Pew's sample, consumers paid for add-ons like auto club memberships and credit insurance.
Only 1 in 5 loans were made to new borrowers. The rest were made to refinance loans or to write a new loan to a previous customer. Approximately two of every three loans were originated consecutively. Pew found one instance where a Colorado consumer refinanced a loan 37 times – paying $1,980 to borrow $200. In focus groups, borrowers reported that lenders marketed the opportunity to renew loans.