Another big bank gets into Small-Dollar Loans

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Another Bank of the Big Banks Gets In Small-Dollar Loans
Often without interest and with very low fees, these loans provide a better alternative to payday loans.
by Cara Smith Lead Writer | Investing, auto loans, crypto Cara Smith is a lead writer at NerdWallet in which she writes on investing, cryptocurrency , and auto loans. She has covered commercial housing, real estate and general business for Houston Business Journal, CoStar News and other publications. She was a student of psychology and journalism in The University of Houston, where she was editor-in-chief of the university's student newspaper. She lives in Chicago and is on the lookout every day for the authentic Tex-Mex across the Midwest.





Dec 9, 2022


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Wells Fargo, which operates more than 4,700 branches across the U.S., has rolled out a small-dollar loan program that provides immediate, automated loans received in minutes and with a fraction of the charges typically associated with payday loans.
The bank is among a growing list of major financial institutions including U.S. Bank, Bank of America, Huntington and Trust to name just some -- that provide alternatives to the 12 million who rely on payday loans each year, majority of them belonging to communities that are systematically excluded from access to traditional financial tools. Through the programs offered, 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 biggest developments for financial inclusion in the last decade," says Alex Horowitz, principal officer of Pew's Consumer Finance Project.
Payday loans are low-cost, high-interest loans secured with the borrower's next paycheck- often target people who have no other options for borrowing money. They are expensive, with annual percentage rates averaging 391 percent, according to the Consumer Financial Protection Bureau. While traditional personal loans have annual average percentage rates between 6% and 36%.
In addition, since they have access to their borrowers their checking account, the payday lender are able to steal money to pay back the loan usually before the borrower has had a chance to pay off their debts or other lenders. Loans from banks offer an opportunity for those who do not have a source of support in difficult financial times.
"Non-bank, high-cost lenders are likely to be unable to retain customers from banks. This is great news for consumers," says Horowitz, who wrote a report study on the current trend for Pew.
Pew researchers predict annual savings of over $10 billion for borrowers when the majority of the millions of customers who utilize payday loans switch to using banks"small-dollar loan programs.
How small-dollar bank loans function?
With the Wells Fargo Flex Loan program, customers are able to borrow $500 or $250. The $250 loan is accompanied by a $12 cost, and the $500 loan includes $20 in fees. The loans are interest-freeand have no fees for late payments or hidden charges, as per an account report by Wells Fargo. The entire process can be done through the Wells Fargo mobile app, with cash appearing in your account in a matter of seconds after requesting the loan. Borrowers repay their loan in four monthly installments, which is a cry from the typical payday loans repayment schedule, which typically requires that borrowers pay back the loan between two and four weeks after they have borrowed.
There's no credit test; the main qualifying requirement includes having an account with the bank.
Most banks' appearances are like this, though they have different fees. Under Bank of America's program, people can borrow $500 for $5. U.S. Bank, which was the first major bank to provide small-dollar loans and charges a $6 fee for every $100 borrowed. And Huntington Bank's program offers small loans between $100 and $1000 for no fee but a 1% monthly interest fee, or 12% APR.
You might be wondering: Are these loans simply a means to repackage overdraft fees? The short answer is no. Overdraft fees typically range from $30. They are taken automatically from your checking account and typically returned within a few days instead of months. Most overdraft fees are paid by people who are able to overdraw their accounts frequently, more than twenty times per each year Horowitz says. At $30 a pop, that quickly amounts to around $600 annually in fees for overdrafts.
If you evaluate the fees and repayment schedules with small-dollar loans and crediting your account and overdrafting your account, you will see the savings.
"If you borrow $500 for three months, they'll have to pay less than an overdraft fee" Horowitz says. "It's an incredible improvement. Small loans can be a alternative to overdrafts because they give people a better option."
With Wells Fargo's recently launched program Six of the nation's 10 largest banks by number of branches now offer small-dollar loans, according to data provided by the Federal Reserve. Two of the biggest banks that do not provide loans for small amounts loans are Chase Bank and PNC Bank. Chase Bank confirmed this, saying that "we're constantly reviewing our offerings to make sure we're meeting the needs that our customers have" in a statement sent to NerdWallet. PNC has not responded to an inquiry for comment.
Collectively, the six largest banks that provide small-dollar loans run 15,289 branches across the country, according to the Federal Reserve. It's worth noting that lower-income neighborhoods -- which are the ones that were the most affected by payday loans were able to lose more branches at banks than high-income neighborhoods in the years 2009-2017, following the Great Recession, according to an analysis by the Federal Reserve Bank of Philadelphia. And between 2014 and 2018, banks closed more branches than established in low-income neighborhoods according to Bloomberg.
Since these loans are available on banks' mobile apps and completely automated, borrowers do not need to live near a bank branch to have accessibility to the loans.
"The fact that these loans can be obtained through mobile online banking means somebody isn't required to visit a branch," Horowitz says. "Even if they would have to travel for a long distance it's not necessary to go there to avail these loans."
Another factor to take into consideration is that many individuals aren't able open the checking accounts necessary to get these loans. Banks are able to deny applications for those who have previous history of charges for overdrafts or with negative balances. They may also not be maintaining the necessary balances in their accounts. And while second-chance checking accounts are available for those customers however, they're missing out from the benefits of smaller-dollar loans.
"The largest threat to payday loans'
There's a reason payday loans have remained popular and readily available -- even though prohibited within 18 states, and Washington, D.C. -- in spite of their well-documented predatory practices They're simple to access, and there are few alternatives. Since payday loans don't require a credit check, they've become one of the only short-term loans available to people who have poor or no credit. A majority of lenders will require a valid ID and proof of employment for full-time employees and a bank account that is open.
Although payday loans are often advertised as quick financial cushioning for unexpected expenses, around 70% of payday loan recipients use the money to pay for regular expenses such as utilities and rent in accordance with an analysis by Pew Charitable Trusts. A typical payday loan borrower earns $30,000 per year, and 58% of those who borrow have difficulty with their bills each month, according to the analysis.
With one more major bank offering an option that's viable, and potentially inducing other banks to offer the same, it's certainly not unattainable to envision a time in which payday loans no longer monopolize the small-cash loans sector.
"From an economic standpoint, banks' small loans likely pose the biggest risk to payday loan lenders that has yet to be established," Horowitz says.
It is important to note that banks are not the first financial institutions to offer payday loan alternatives. Since the beginning of time, credit unions have offered , or PALS, that vary between $200 and $1000 with application fees that cannot exceed $20. PALS was created by the National Credit Union Administration created PALS in 2010 to "provide members of credit unions an alternative to costly payday loans," the administration wrote in its filing.
On the fintech side, such as Earnin, Dave and Brigit let users access small amounts of money from their next pay checks. These apps do not charge interest, but could charge fees for services such as speedy shipping or for processing. A lot of apps ask users to submit some tips.
Banks have been innovative in this area and have also innovated. Ally Bank eliminated all overdraft charges in 2021. SoFi does not charge any fees for overdrafts of $50 or less. Also, while Chase Bank charges a $34 fee for each overdraft transaction- up to three times per day, for a total of $102 It doesn't begin charging this fee until your account is overdrawn by more than $50.
To determine the availability of your bank's small-dollar loans contact your bank and ask about loans available to customers. If you have your bank's mobile application, look it up -- most of these programs are available primarily on the bank's app.


The author's bio: Cara Smith joined NerdWallet in 2021 following reporting on real estate and business within Houston and Chicago for eight years.







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