Another Bank of the Big Banks Gets In Small-Dollar loans

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Another Bank of the Big Banks Gets In Small-Dollar Loans
Often without interest and with minimal fees, these streamlined loans provide a better alternative in place of payday loans.
Written by Cara Smith Lead Writer | Investments, auto loans, crypto Cara Smith is a lead writer for 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 completed her studies in psychology and journalism in the University of Houston, where she was the editor-in chief of its student newspaper. She lives in Chicago, where she searches all day long in search of authentic Tex-Mex in the Midwest.





Dec 9, 2022


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Wells Fargo, which operates more than 4700 branches across the U.S., has rolled out a small-dollar loan program that offers instant automated loans that can be made in a matter of minutes with a fraction of the fees typically attached to payday loans.
The bank is among an increasing number of major financial institutions such as U.S. Bank, Bank of America, Huntington and Trust to name just a few -- offering alternatives to the 12 million who rely on payday loans each year, majority of them belonging to communities that are denied access to traditional financial instruments. Thanks to this program, a report from the Pew Charitable Trusts' Consumer Finance Project estimates that each year consumer savings from predatory payday loans will eventually be billions of dollars.
"This is among the biggest developments for financial inclusion over the past decade," says Alex Horowitz the chief executive officer of Pew's Consumer Finance Project.
Payday loans are small high-interest loans that are secured by the next pay check owed to the borrowertypically target those with no other options to borrow money. They are expensive with annual percentage rates that average 391%, according to the Consumer Financial Protection Bureau. Meanwhile, traditional personal loans are characterized by annual percentage rates between 6% and 36%.
And because they have access to their customers' checking accounts, payday lenders are able to take money and use it to repay the loan and often before the borrower even has a chance to pay their bills or other lenders. The bank loans are a great some relief to those who do not have a source of support during difficult financial times.
"Non-bank, high-cost lenders will lose customers to banks. This is great news for consumers," says Horowitz, who wrote a report on the trend for Pew.
Pew researchers project annual savings of over $10 billion among borrowers, after which the vast majority of customers who utilize payday loans switch to using banks"small-dollar loan programs.
What are the nuances of small-dollar bank loans work
In Wells Fargo's Flex Loan plan, clients can borrow $250 or $500. The $250 loan comes with a $12 cost, and the $500 loan includes $20 in fees. The loans are interest-free, with no hidden charges or late fees, according to the report from Wells Fargo. The entire process is completed in the Wells Fargo mobile app, with cash appearing in your account within a matter of minutes of making the loan. The borrower pays back their loan in four monthly installments -a vast contrast to the standard payday loans repayment schedule, which generally requires borrowers to pay back the loan two to four weeks after borrowing.
And there's no credit check; the main qualifying requirement being having an existing account at the bank.
Most banks' appearances are similar, though they have different fee structures. In the Bank of America program, people can get $500 for a $5 fee. U.S. Bank, which was the first major bank to offer small-dollar loans and charges an additional $6 for each $100 borrowed. The Huntington Bank program also offers small loans of between $100 and $1,000 without charge, with a 1% monthly interest cost, or the rate of 12% APR.
You may be wondering: Are these loans simply a means to package overdraft charges? The answer is no. Overdraft charges are typically around $30. They're automatically deducted from your checking account , and are typically reimbursed within a few days, not months. The majority of overdraft charges are paid by those who have their accounts overdrawn frequently, more than twenty times per year, Horowitz says. At $30 a pop it quickly adds up to $600 in annual overdraft fees.
When you compare the fees and repayment times between small-dollar loans and taking overdrawn your account The savings are apparent.
"If you borrow $500 for three months, they'll have to pay less than one overdraft charge," Horowitz says. "It's an enormous difference. Small loans are part of the solution to overdrafts, because they give people a better alternative."
With Wells Fargo's recently launched program Six of the nation's 10 largest banks in terms of branches now offer small-dollar loans according to figures obtained from the Federal Reserve. The two largest banks that do not provide smaller-dollar loans are Chase Bank and PNC Bank. Chase Bank confirmed this, adding that "we're constantly reviewing our offerings to make sure we're meeting the requirements that our customers have" in a letter to NerdWallet. PNC did not respond to an inquiry for comment.
Collectively, the six largest banks offering small-dollar loans have 15,289 branches in the United States in accordance with the Federal Reserve. But it's important to note that low-income communities -- which are the ones that are the most affected by payday lending were able to lose more branches at banks than high-income communities from 2009 to 2017 during the aftermath of the Great Recession, according to a study from the Federal Reserve Bank of Philadelphia. Between 2014 and 2018, banks closed 1,915 more branches than they were able to open in neighborhoods with lower incomes, per Bloomberg.
But since these loans are accessible through banks' mobile apps and completely automated, borrowers don't have to be near the bank's branch to gain accessibility to the loans.
"The reality that the loans can be obtained through mobile online banking , it means that someone does not have to go to an office," Horowitz says. "Even if they would have to travel for a long distance but they don't need to travel that distance to obtain the loans."
Another important consideration: Many people aren't able to access the checking accounts required for these loans. Banks can deny account 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 accessible to customers with these issues, they're still missing out on the advantages of small-dollar loans.
The biggest threat to payday lenders'
There's a reason payday loans have remained popular and readily available -- even though banned in 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 few short-term loans available to people with low or nonexistent credit. Most lenders only require an ID that is valid or proof of full-time employment as well as an active bank account.
Although payday loans are often advertised as quick financial cushioning for unexpected expenses, about 70% of payday loan recipients use the money to pay for regular expenses such as utility bills and rent as per an analysis conducted by Pew Charitable Trusts. Average payday loan borrower earns $30,000 per year; 58% of the borrowers face difficulties making their payments on time, according to the study.
With one more major bank providing a viable alternative and potentially encouraging other banks to do the similar, it's not impossible to envision a future where payday loans no longer monopolize the small-cash loans sector.
"From perspective of competition from a competitive perspective, banks' tiny loans are likely to pose the greatest threat to payday lenders that has yet to emerge," Horowitz says.
It is important to note that banks aren't the first financial institutions to offer payday loan alternatives. For over a decade, credit unions have been offering PALS, also known as PALS. These loans are between $200 and $1,000 with fees for application that can't exceed $20. PALS was created by the National Credit Union Administration created PALS in 2010 to "provide credit union members with an alternative to high-cost payday loans," the administration said in a filing.
On the fintech end, apps like Earnin, Dave and Brigit allow users to access small amounts of money from their pay checks. These apps don't charge interest rates, however, they could charge fees for services like speedy payment or process. Many apps also ask users to include suggestions.
Banks have innovated in the sector as well. Ally Bank eliminated all overdraft charges in 2021. SoFi does not charge fees for transactions that cost under $50. Also, while Chase Bank charges a $34 fee for each overdraft transaction- up to three times a day, with a maximum of $102 -- it doesn't start charging you for that fee until your account has been overdrawn in excess of $50.
To determine if your bank offers small-dollar loans make a phone call to your bank and inquire about loans that are available to customers. If your bank has a mobile application, look it up as a majority of these programs are available mostly on the app of the bank.


About the author: Cara Smith joined NerdWallet in 2021 after reporting on real estate and commercial properties within Houston and Chicago for eight years.







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