Increasingly, there are more and more institutions cropping up who are willing to make payday loans to low income Americans with poor or no credit scores. Many of these institutions are traditional banks, however, and not payday lenders, thanks to a program sponsored by the FDIC.
There are a large number of people in the low-income ranges that may be able to benefit from smaller dollar loans. Traditionally, these folks have turned to payday lenders. Payday lenders meet a very specific need. However, they have their critics as some people claim payday loans are predatory or unreasonable.
Today, there are 31 commercial institutions in 26 states that are participating in the new FDIC program. This program offers small dollar loans of less than $2,500 for a short term. While some of these banks have been offering these kinds of loans for some time, many of them are new and have started offering the loans as a part of the response to the FDIC program.
The goal of the FDIC program is to assist between 80 and 100 million Americans avoid either payday loans or overdraft protection programs with high fees. The program will be completed this year, and the FDIC will be releasing a report with its results in February of 2020.
The small-dollar borrower can be an attractive new customer base for the banks. These are designed to be an alternative to the high rates that consumers pay with other options. Consumers can then use these small dollar loans to help build their credit scores.
The average term for these loans is around nine months. The interest rate is usually between 14 percent and 18 percent APR. This is significantly lower than the alternatives of overdraft protection or of payday loans.
With overdraft protection in a bank account, consumers will overdraw their account and be charged a fee of $35 or more for the overdraft, no matter how much the draw is. This amounts to around $35 billion each year in the banking industry. Most of those fees come from account holders with low income, who intentionally overdraw their account as a sort of short term loan to cover their living expenses. Overdraft is something of a line of credit for some people.
Whether these kinds of FDIC loans will overtake the popularity and convenience of payday loans, of course, remains to be seen.