The FDIC (Federal Deposit Insurance Corporation) has implemented a program that encourages banks to offer small dollar loans, comparable to payday loans, but is finding that the program hasn't been all that successful. It seems that banks just can't compete with payday loan lenders as far as cost and ease are concerned.
The FDIC found that only 31% of banks participated in the program and that during the first four quarters of the two year-long pilot, a mere $5.5 million was generated by a little over 8300 small dollars loan offered by banks. Payday lenders see about 150 million loan every year which amounts to billions.
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The report done by the FDIC found that small dollar loans don't necessarily save consumers money.The program had banks offers these types of loan at what seemed to be lower interest rates, but because payment terms were longer, overall the consumer was paying the same amount of interest and fees as they would with a traditional payday loan. Although participating banks loan twice, or even three times as much as payday loan lenders, they still do not get the amount of business that payday lenders receive. The average small dollar loan at banks is about $675 and carries an average interest rate of 15%. Banks offer loan terms from 10-12 months.
Payday loan amounts offered by Internet and brick and mortar lenders are capped depending on the state they are given. Amounts range from $200-$1,000. Interest rates are over 500% when calculated at a yearly rate but with loan terms for payday loans being only 2-4 weeks, the interest rate paid is actually lower. The problem with these loans occurs when the borrower opts to "rollover", or extends their loan which causes them to incur more interest and fees.
Traditional banks aren't necessarily looking to gain a great deal of small dollar loans. They do, however, hope to build long-term relationships with customers via these short-term loans. They may see this program as a gateway to gaining new and repeat customers as well as short-term profitability.
Convenience may just be the biggest factor when it comes to banks and payday loan lenders competing for your business. Payday loans are easy to come by as they require only a minimal amount of information on the borrower's part. A fast application filled out online or in store means quick approval and funding. Consumers can fill out the application, provide information about their job and income, submit a bank statement and be approved the very same day. Once a loan amount is determined, the lender will directly deposit the funds into the borrower's bank account.
Typically, the lender will set up a payment schedule based on the borrower's pay schedule and will expect the loan to be repaid in full with the borrower's next paycheck. If making payment is a problem, most lenders will work with the consumer by extending the loan to ensure full repayment. Because a credit check is not part of the application process, the consumer will most likely not incur any negative reporting on their credit report.
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