NCLC Report: Misaligned Incentives: Why High-Rate Installment Lenders Want Borrowerrs Who Will Default

Here.  Here's the beginning of the Executive Summary:

Lenders normally want borrowers who will pay back their loans in full. This seems obvious—otherwise, won’t the lender lose money?

Yet in the high-rate installment loan market, the normal incentive to make affordable loans does not work. When loans have high interest rates, lenders may seek out and can profit from borrowers who will default in significant numbers. The gap between lender and borrower success can encourage business models that harm numerous consumers.

This report analyzes the inherently dysfunctional and harmful dynamics of high-rate installment loans. In a responsible loan market, the lenders’ profits are closely aligned to the successful repayment of the credit. Borrowers and lenders have parallel incentives and share the same goals of successful repayment. But high-rate lending can lead to asymmetrical incentives:

As long as the borrower pays long enough before defaulting, a high-rate installment loan will be profitable. If the borrower makes even half the payments on a longer-term highrate installment loan, the lender may receive sufficient cash flow to recover the amount loaned and another 50% or more, likely more than enough to turn a profit.

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While the lender may have a successful experience, default causes a cascade of devastating consequences that are likely to plague the consumer for a lifetime.




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