Another Big Bank Gets Into Small-Dollar Loans
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Another big bank gets into Small-Dollar Loans
In most cases, with no interest and very low fees, these loans provide a better alternative to payday loans.
By Cara Smith Lead Writer | Investments, auto loans and cryptocurrency Cara Smith is a lead writer for NerdWallet where she writes about investing, cryptocurrency , and auto loans. She has reported on commercial real estate, housing and general business issues for Houston Business Journal, CoStar News as well as other publications. She completed her studies in psychology and journalism at the University of Houston, where she was editor-in-chief of the university’s student newspaper. She is located in Chicago and is on the lookout every day for the authentic Tex-Mex throughout the Midwest.
Dec 9, 2022
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Wells Fargo, which operates more than 4700 branches across the U.S., has rolled out the small-dollar loan program that gives instant automated loans that can be made in a matter of minutes with a fraction of the charges typically associated with payday loans.
The bank is among an expanding list of top financial institutions including U.S. Bank, Bank of America, Huntington and Trust, to name some — that provide alternatives for the 12 million who rely on payday loans each year, many of whom belong to communities that are denied accessibility to conventional financial tools. Thanks to these programs, a study by the Pew Charitable Trusts’ Consumer Finance Project estimates that annual consumer savings from the shady payday loans will eventually be billions of dollars.
“This is among the most significant advances in financial inclusion in decades,” says Alex Horowitz who is the Pew’s chief officer. Consumer Finance Project.
Payday loans are tiny, high-interest loans which are secured by the next pay check owed to the borrower- often target people with no alternatives to borrowing money. The fees are exorbitant and the annual percentage rates averaging 391%, according to the Consumer Financial Protection Bureau. While traditional personal loans are characterized by annual percentage rates between 6 and 36%.
They also have access to their customers’ checking accounts, payday lenders can siphon money to pay back the loan usually before the borrower has had an opportunity to pay their bills or other lenders. Loans from banks offer relief for people who often do not have a source of support when they are facing financial hardship.
“Non-bank, high-cost lenders will be unable to retain customers from banks. And that’s great news for customers,” says Horowitz, who wrote a report study on the current trend for Pew.
Pew researchers project annual savings of more than $10 billion for borrowers after which the vast majority of customers who utilize payday loans switch to using banks’ small-dollar loan programs.
How small-dollar bank loans work
With the Wells Fargo Flex Loan plan, clients are able to borrow $500 or $250. The $250 loan comes with a $12 fee, and the $500 loan comes with the same fee of $20. The loans are interest-freeand have no hidden charges or late fees, according to the statement by Wells Fargo. The entire process is completed in the Wells Fargo mobile app, cash deposited in your account within a matter of minutes of making the loan. Borrowers pay back their loan by making four installments per month — a far cry from the typical payday loans repayment schedule, which usually requires borrowers to repay the loan between two and four weeks after borrowing.
There’s no credit test The primary requirement includes having an account with the bank.
Most banks’ appearances are similar to this, but they have different fees. Under Bank of America’s program, people can borrow $500 for a $5 fee. U.S. Bank, which was the first major bank offering small-dollar loans that charge an additional $6 for each $100 borrowed. The Huntington Bank program also offers small loans between $100 and $1000 with no cost, but the interest rate is 1% per month. fee and the rate of 12% APR.
You might be wondering: Are these loans simply a means to package overdraft charges? The answer is no. Overdraft fees are usually around $30. They’re automatically deducted from your account in the form of a check and usually paid back within a few days and not months. The majority of overdraft charges are paid by those who are able to overdraw their accounts frequently, more than twenty times a year, Horowitz says. For $30 per transaction this quickly adds up to around $600 annually in overdraft fees.
When you compare the fees and repayment plans with small-dollar loans and crediting your account and overdrafting your account, you will see the savings.
“If someone borrows $500 over three months, they’ll have to pay less than an overdraft fee” Horowitz says. “It’s an immense distinction. Small loans can be a solution to overdrafts, because they give people a better option.”
Through Wells Fargo’s newly launched program that was launched recently, six of the country’s 10 largest banks in terms of branches offer small-dollar loans, according to data provided by the Federal Reserve. The two largest banks that don’t offer smaller-dollar loans comprise Chase Bank and PNC Bank. Chase Bank confirmed this, saying that “we’re always reviewing our products to make sure we’re meeting the requirements of our customers” in a statement sent to NerdWallet. PNC did not return an inquiry for comment.
Collectively, the six largest banks that provide small-dollar loans have 15,289 branches in the United States as per the Federal Reserve. But it’s important to note that neighborhoods with lower incomes — which are the ones that were the most affected by payday loans — lost more bank branches than higher-income communities in the years 2009-2017 in the aftermath of the Great Recession, according to an analysis by the Federal Reserve Bank of Philadelphia. Between 2014 and the year 2018, banks shut down 1,915 more branches than they opened in lower-income neighborhoods according to Bloomberg.
Since these loans are accessible through banks’ mobile applications and are completely automated, the borrowers don’t need to be in close proximity to the bank’s branch to gain the ability to access these loans.
“The nature of these loans are available through mobile banking online means that a person does not have to go to an office,” Horowitz says. “Even the possibility that they’d need to travel several miles otherwise, they don’t have to travel that distance to obtain the loans.”
Another important consideration: Many individuals aren’t able open the checking accounts necessary for these loans. Banks are able to deny applications from those with a history of overdraft fees or with negative balances. They may also not be keeping the required balances on their accounts. While second-chance checking accounts are available for those customers, they’re still missing out on the benefits of small-dollar loans.
The most significant threat to payday lenders’
There’s an explanation for why payday loans have remained popular and accessible — even though they’re restricted in 18 states and Washington, D.C. -regardless of their well-documented and infamous predatory practices: They’re easy to get, and there are few alternatives. Since payday loans don’t require a credit check, they’ve become one of the few short-term loans that are available to those with poor or no credit. The majority of lenders require only an ID that is valid, proof of full-time employment as well as an active bank account.
Although payday loans are often advertised as quick financial cushions for unexpected expenses, about 70 percent of payday loan recipients use the cash to cover recurring expenses such as utilities and rent as per an analysis by Pew Charitable Trusts. The average payday loan borrower earns $30,000 annually; 58% of the borrowers face difficulty paying their monthly bills, according to the study.
With a major bank providing a viable alternative and potentially inducing other banks to offer the same, it’s certainly not unattainable to envision a future in which payday loans no longer monopolize the small-cash loans sector.
“From an economic standpoint from a competitive perspective, banks’ tiny loans could be the most significant risk to payday loan lenders that have not yet to emerge,” Horowitz says.
It is important to note that banks are hardly the first financial institution to provide payday loan alternatives. For over a decade, credit unions have been offering PALS, also known as PALS. These loans vary between $200 and $1000 with fees for application that can’t exceed $20. The National Credit Union Administration created PALS in 2010 to “provide members of credit unions with an alternative to costly payday loans,” the administration wrote in its filing.
On the fintech side, like Earnin, Dave and Brigit allow users to access small amounts of money from their paychecks. They don’t charge interest, but could charge fees for services like fast payment or process. Many apps also ask users to submit some tips.
Banks have been innovative in this space and have also innovated. Ally Bank eliminated all overdraft fees by 2021. SoFi does not charge fees for overdrafts of $50 or less. While Chase Bank charges a $34 fee for each overdraft transactionat least three times per day, for a total of $102 — it doesn’t start charging that fee unless your account is overdrawn by more than $50.
To find out the availability of your bank’s small-dollar loans make a phone call to your bank to inquire about loans that are available to customers. If your bank has a mobile app, make sure to check it as a majority of these programs are hosted predominantly on the app of the bank.
Author bio Cara Smith joined NerdWallet in 2021, after covering business and real estate within Houston and Chicago for eight years.
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