America’s Middle Class Is Addicted to a New Kind of Credit

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The payday-loan business was in decline. Regulators were circling, storefronts were vanishing and investors were abandoning the industry’s biggest companies en masse.

And yet today, just a few years later, many of the same subprime lenders that specialized in the debt are promoting an almost equally onerous type of credit.

It’s called the online installment loan, a form of debt with much longer maturities but often the same sort of crippling, triple-digit interest rates. If the payday loan’s target audience is the nation’s poor, then the installment loan is geared to all those working-class Americans who have seen their wages stagnate and unpaid bills pile up in the years since the Great Recession.

In just a span of five years, online installment loans have gone from being a relatively niche offering to a red-hot industry. Non-prime borrowers now collectively owe about $50 billion on installment products, according to credit reporting firm TransUnion. In the process, they’re helping transform the way that a large swathe of the country accesses debt. And they have done so without attracting the kind of public and regulatory backlash that hounded the payday loan.

“Installment loans are a cash cow for creditors, but a devastating cost to borrowers,” said Margot Saunders, senior counsel for the National Consumer Law Center, a nonprofit advocacy group.

Subprime Evolution

For many families struggling with rising costs and stagnant wages, it’s a cost they’re increasingly willing to bear.

In the decade through 2018, average household incomes for those with a high school diploma have risen about 15%, to roughly $46,000, according to the latest U.S. Census Bureau data available.

Not only is that less than the 20% increase registered on a broad basket of goods over the span, but key costs that play an outsize role in middle-class budgets have increased much more: home prices are up 26%, medical care 33%, and college costs a whopping 45%.

To keep up, Americans borrowed. A lot. Unsecured personal loans, as well as mortgage, auto, credit-card and student debt have all steadily climbed over the span.

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