Latest posts by Henry Githinji (see all)
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Installment loan regulations
The lending industry has been marred by irregularities and has been a common place for lenders to extort money from unknowing borrowers. Installment loan lending has also landed in this situation. The sector is full of unregulated practices and has been known to abuse its power when it comes to lending money and fixing higher interest rates to get higher returns. All these are at the expense of the borrowers and cause a lot of financial strain on them. This has caused the government to try and help solve this situation which is now becoming a mess and a big problem for borrowers who are drowning in debts. It is becoming a crisis for a lot of people all over the nation.
The primary way to protect borrowers from exploitation is to put caps on interest rates. Studies conducted in the past have shown that there are different types of caps in different states. In fact, state legislation and regulation are the reasons why the interest in the states in question are getting out of hand. The state determines the amount of interest you pay for a loan. This is because, in some states, the laws are quite strict while in other places, the laws are generalized, making it really difficult to regulate the amount of interest that borrowers have to pay for loans they take.
In a state like Louisiana, there is a cap of about 36% on cash loaned and also for other elements such as a $50 origination fee and $20 documentation fee. This brings the whole APR of the loan to about 85%. In 19 states, a $500 closed-end installment loan is with all fees included has an APR of between 16% to about 36%. About 13 states allow for 54% APR and out of those 13, 10 allow the APR to rise from about 61% to almost 116%. 4 states have no capped interest rate. Typically, we can say that all states have different legislation on this issue.
Regulatory steps for installment loans
Placing loophole-free caps and rates
The main reason why loans cannot be actually regulated is because of the different legislation in different states. Lenders are plotting daily to dig deeper into the borrower’s pockets. How do we solve this? Common laws. Placing strict and well-defined caps on interest rates will keep the lenders in check and thus help regulate the interest rates they charge on loans. Placing these caps across all states in a uniform manner saves borrowers the risk of being exploited. If a law is to be established, it should be established across all states.
Banning sale of credit insurance and other add-on products
Such add-ons are generally only beneficial to the lender and lead to the increase in the credit cost rates, making the loans simply unaffordable for most people. Banning them will make loans more affordable for most borrowers.
Checking borrower’s background
This is essential to make sure that the lender runs a check on the borrower’s background to determine if he is able to repay a certain amount of loan in due time. This will save both the lender and the borrower from future conflicts over repayment issues.
Minimizing differences between state installment loans and state open-end credit
Putting them at an equilibrium level prevents the people who may decide to switch their products to Open-end credit laws. This mainly applies to people who are high-cost lenders.
Making unlicensed and illegal loans void and uncollectible
First of all, no business person wants to suffer a loss. This works to keep everyone in check and more so for those who lend money illegally. Making those illegal loans void puts their business at a loss and thus discourages unlawful and unlicensed lending activities.
Having regulations in the lending industry keeps everyone in check and let legit lenders operate in a conducive business environment for themselves and their borrowers.