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.
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.