Kent Younce Reveals the Truth about Small Dollar Loans

By Jackson Matheson
August 15, 2012

Kent Younce, consumer loan expert, this week revealed to Today’s News on the Web some important facts that many people do not understand about small-dollar loans. Knowing these facts can make all the difference for consumers who are trying to make smart money decisions in a tight economy.

According to Younce, separating the myths from facts regarding borrowing can help consumers who may not necessarily be well informed about this important area. Younce referred us to this list of commonly held misconceptions—and the truth behind them:

Myth: Capping the annual percentage rate (APR) on small-dollar loans is a way to protect consumers.

Fact: For small-dollar loans, interest rate limits actually works against consumers’ best interests. Arguments for across-the-board low rates overlook the critical fact that for small-dollar loans, low rates can mean that this beneficial type of credit becomes unavailable to consumers. Legitimate, regulated lenders simply cannot afford to offer the loans. In addition, loan products like credit cards, some of which may have lower rates, can often mean higher costs for the consumer, because credit cards are structured with minimum payments and indefinite terms, and borrowers can instantly take on more debt.

In fact, well-structured small-dollar loans, such as traditional installment loans (TILs), can help individuals survive a financial crisis. A study conducted by George Mason University demonstrated that limiting access to small-dollar loans greatly reduced consumers’ likelihood of surviving times of economic uncertainty. Traditional installment loans help address the immediate needs of consumers, providing much-needed time and support to weather a financial storm or to identify longer-term solutions to financial challenges.

While interest rate caps clearly shut down some of the least safe forms of consumer credit (such as title loans), they also shut down one of the safest and most important forms of small-dollar consumer credit—traditional installment loans. At the same time, such caps leave untouched the unsafe products (such as unregulated, offshore, and Internet loans, or mortgage-backed revolving credit). When TILs are not available, people often turn to these less safe and undisciplined forms of credit.

What determines whether a loan is safe is the way it is structured. The structure of TILs is designed to protect consumers. Trying to use interest rate caps as a way to prevent unsafe loans makes about as much sense as banning all red cars. In the process, some unsafe cars will perhaps be taken off the road, but so will some of the safest, while leaving many unsafe cars on the highway.

TILs are structured to be both safe and responsible.

Myth: Traditional consumer installment loans are “high-cost” loans.

Fact: TILs are actually low-cost, even if the APR rate appears to be high. We must remember that actual costs to consumers are measured in dollars, not rates. For example, consider the difference between a $500 loan with an 36% APR versus a $500 loan with a 99% APR. When paid over a six-month period under a traditional installment monthly payment plan, the 36% APR loan carries a monthly payment of $92, compared to a monthly payment of $109 for the 99% APR loan. The difference is actually only 57 cents per day.

Myth: Small-dollar loans are predatory and given to anyone who walks in off the street.

Fact: Traditional installment loans are proven to be high quality and responsible small-dollar loans that help consumers meet important household needs without depleting savings. In fact, TILs are given only to consumers who qualify based on established underwriting standards. Generally, about 40% to 50% of applicants will qualify for a TIL.

TIL lenders work with successful applicants to structure the loan in a way that builds in consumer protections and gives the borrower a clear path out of debt. The amount borrowed is paid off over the term of the loan with fixed, equal monthly installments of principal and interest, with no balloon payments. In this sense, traditional installment loans are like a standard mortgage or car loan from a credit union or bank. These traditional installment loans offer a safe and affordable option for consumers that must be protected in today’s financial climate.

Myth: If mortgage lenders can make loans at 5% to 8%, small-dollar lenders should be able to make loans at less than 36%.

Fact: Although it is true that a 36% rate would be exorbitant for a $200,000 30-year mortgage, a rate as low as 36% would not be sufficient for a $500 loan for six months, because it wouldn’t even cover a lender’s costs.
Interest rates on TILs are agreed to by the borrower and lender at levels that the lender determines will cover both the lender’s fixed costs of operating his business and the risk of non-payment by the borrower. Traditional installment lenders properly underwrite their loans by evaluating both the borrower’s creditworthiness (checking the borrower’s credit report and other credit references) and the borrower’s ability to pay (checking the borrower’s sources, stability, and reliability of income).
For this reason, traditional installment lenders are able to offer credit to qualifying borrowers at market rates that are far lower than the rates offered by lenders who do not conduct similar underwriting.

Myth: The U.S. military restricts the use of traditional installment loans for military service members.

Fact: On the contrary, the U.S. military has identified traditional installment loans as a beneficial and responsible form of credit for military service members. In fact, the Department of Defense specifically exempted traditional installment loans from the rate cap limits in the 2007 John Warner Defense Authorization Act, which in its final rule notes the need to “isolate detrimental credit products without impeding the availability of favorable installment loans.”

Kent Younce points out that traditional installment loans are available in most small communities in the United States in brick and mortar offices. Although you can find the location of a TIL lender on the Internet, a hallmark of TIL lenders is that they sit down with their clients face-to-face to discuss the borrower’s needs and lending options. TILs are often a low-cost alternative to other loan products, and far safer for many consumers than even credit cards. “Too many people,” Younce explains, “get themselves in trouble by making minimum payments on credit cards. This drives up the actual cost of a loan tremendously without most people even realizing it.”

For consumers who want to learn more about small-dollar borrowing, Younce suggested visiting the following websites:

Association for Installment Lending: http://associationforinstallmentlending.org/
Responsible Consumer Loans: http://responsibleconsumerloans.org/

Burlington, NC: (January 14th, 2011) — As consumers still face a challenging economic climate, the importance of ensuring continued access to responsible, affordable, and disciplined personal loans remains a top priority for North Carolina’s licensed and regulated consumer finance companies.

This week, members of North Carolina’s state association, the RLNC, met to discuss the importance of the recently released North Carolina Commissioner of Banks Consumer Finance and Banking Survey.

As with the previous survey, customer satisfaction continues to rate very high for personal loan companies in North Carolina. The two NCCOB surveys report overall satisfaction rates of between 83% and 95%.

“Once again, as we saw in the previous NCCOB survey, consumer finance companies continue to maintain a very high level of overall customer satisfaction,” said William Braxton, current president of the state-based lenders’ association. “Given the considerable criticisms that have been leveled at Wall Street, and financial services in general over the past two years, it is quite an achievement that North Carolina’s personal loans continue to earn such a high level of appreciation and trust from our customers.”

In addition to the NCCOB’s surveys, members also reviewed a November 17th, 2010 report of consumer finance and credit complaint data compiled by the Consumer Protection Division of the North Carolina Department of Justice for the years 2008, 2009, and YTD 2010.

The report was prepared for the Commissioner of Banks’ consumer finance study which was being conducted at the direction of the last North Carolina General Assembly. The Joint Legislative Study Commission on Modernizing the Consumer Finance Act looked into the long-term industry challenges in meeting on-going personal loan needs in North Carolina.

Data from the report, which also included Non-Bank Mortgage, Auto Finance, Banks, and Internet Payday, indicated that total complaints against the Consumer Finance Companies in North Carolina comprised only 5% of all financial services complaints filed with the Consumer Protection Division over the three year period.

“With an estimated 980,000 personal loan transactions conducted by consumer finance companies during this time, the fact that only 245 complaints were filed is a testament to the strong, beneficial relationships that we have with our customers,” said Pam Smith, of Century Finance, a state based, family owned consumer finance company. “This would seem to be a reaffirmation of the data that was presented to the 2010 Joint Legislative Study Commission from over 2,500 existing customers, which had an overall satisfaction rate of 99%.”

“These high levels of customer satisfaction reflect the core values of personal consumer finance companies,” said William Braxton. “The industry just simply couldn’t exist if the customers didn’t feel there was a real value and benefit to the relationship.”

FOR MORE INFORMATION, CONTACT: Erin Wagner, RLNC Executive Committee [336-794-3833, ewagner@wagner-financial.com]

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