For many payday lenders staring at encroaching regulatory restrictions and accusations of predatory lending, the working class’s growing need for credit was an opportunity to reinvent themselves.

They “saw the writing on the wall, and figured, ‘let’s anticipate this and figure out how to stay in business,’” said Lisa Servon, a University of Pennsylvania professor specializing in urban poverty and author of The Unbanking of America: How the New Middle Class Survives.

Triple-Digit Rates

Enter the online installment loan, aimed in part at a fast expanding group of ‘near-prime’ borrowers -- those with bad, but not terrible, credit -- with limited access to traditional banking options.

Ranging anywhere from $100 to $10,000 or more, they quickly became so popular that many alternative credit providers soon began generating the bulk of their revenue from installment rather than payday loans.

Yet the shift came with a major consequence for borrowers. By changing how customers repaid their debts, subprime lenders were able to partly circumvent growing regulatory efforts intended to prevent families from falling into debt traps built on exorbitant fees and endless renewals.

Whereas payday loans are typically paid back in one lump sum and in a matter of weeks, terms on installment loans can range anywhere from 4 to 60 months, ostensibly allowing borrowers to take on larger amounts of personal debt.

In states such as California and Virginia, interest-rate caps enacted years ago and meant to protect payday borrowers only applied to loans below $2,500.

For subprime lender Enova International Inc., outstanding installment loans averaged $2,123 in the second quarter, versus $420 for short-term products, according to a recent regulatory filing.

Larger loans have allowed many installment lenders to charge interest rates well in the triple digits. In many states, Enova’s NetCredit platform offers annual percentage rates between 34% and 155%.