In fact, Virginia sued NetCredit last year for avoiding state interest-rate caps, while California Governor Gavin Newsom earlier this month signed into law a measure capping interest rates on loans between $2,500 and $10,000 at 36% plus the Federal Reserve’s benchmark, currently at around 2%.
A representative for Enova directed Bloomberg to the firm’s latest quarterly filings, wherein the company says that Virginia’s claims are without merit.
“The benefit of installments loans is you have more time to make the payments; the downside is the payments on these high-cost loans go exclusively towards the interest, possibly for up to the first 18 months,” the National Consumer Law Center’s Saunders said.
The industry, for its part, argues that just as with payday loans, higher interest rates are needed to counter the fact that non-prime consumers are more likely to default.
Between Enova and rival online lender Elevate Credit Inc., write offs for installment loans in the first half of the year averaged about 12% of the total outstanding, well above the 3.6% of the credit card industry.
“With high-cost credit, you’re only serving people that won’t qualify for other types of credit, so you’re already in a hardship situation,” said John Hecht, an analyst at Jefferies LLC. “Companies have to price for that.”
According to Elevate’s most recent quarterly financials, net charge offs for their Rise installment loan product equaled about 45% of the revenue those loans generated.
“By the time they get to be our customers, they may have hit that speed bump at least once; often they will have run into medical bills or a job loss, which knocks out their ability to get other forms of credit,” said Jonathan Walker, who heads Elevate’s Center for the New Middle Class, a research and data gathering unit that analyzes the borrowing habits of the more than 150 million Americans without prime credit scores.
Elevate’s average online subprime installment loan customer has an annual income of about $52,000. About 80% have been to college and 30% own a home, according to Walker. More than 10% of the company’s core customer base makes over $100,000 a year.
“Ten years ago it was payday loans or nothing, and today there has been a lot of innovation to meet the consumer where they are,” Walker said.