Another big bank gets into small-dollar loans

Wells Fargo has more than 4,700 branches across the U.S. and has launched a small-dollar loan program. This allows you to get instant, automated loans in just minutes. There are a fraction of the fees associated with payday loans.

This bank joins an increasing number of financial institutions, including U.S. Bank and Bank of America, Huntington and Trust. They offer an alternative to the 12,000,000 people who use payday loans every year. Many of these people are from communities that have been denied traditional financial tools. A report by the Pew Charitable Trusts’ Consumer Finance Project estimated that predatory payday loans could save consumers billions of dollars annually.

Alex Horowitz (principal officer, Pew’s Consumer Finance Project) says that this is the most significant development in financial inclusion for decades.

Payday loans are small, high-interest loans that are secured with the borrower’s next paycheck. They are often targeted at people who don’t have other options. According to the Consumer Financial Protection Bureau, fees can be exorbitant with an average annual percentage rate of 39%. Traditional personal loans average annual percentage rates of between 6% to 36 %.

Payday lenders have access to borrowers’ checking accounts and can siphon money from them to repay the loan. This is often before the borrower has been able to pay their bills. People who are often in financial distress have no other options but to bank loans.

“Banks will lose customers to non-bank, high cost lenders,” says Horowitz. That’s good news for consumers, says Horowitz who wrote a report for Pew on the trend.

Pew researchers estimate that borrowers will save more than $10 billion annually if they switch from payday loans to small-dollar loans offered by banks.

People can borrow $250 and $500 under Wells Fargo’s Flex Loan program. A $250 loan costs $12, while a $500 loan costs $20. According to Wells Fargo, the loans are free of interest and there are no hidden charges or late fees. You can complete the entire process in the Wells Fargo app. Cash will appear in your account within minutes of you requesting the loan. The loan is repayable in four monthly installments. This is a far cry than the traditional payday loan repayment schedule which requires repayments every two to four weeks.

There is no credit check, the only requirement is to have an account at the bank.

Many banks offer small-dollar loans in the same way, but with different fees. People can borrow $500 under the Bank of America program for $5. U.S. Bank was the first major bank that offered small-dollar loans. It charges $6 per $100 borrowed. Huntington Bank offers small loans of $100 to $1,000 with no fees, but there is a 1% interest charge or 12% APR.

You may be wondering if the loans are just for repackaging overdraft fees. The short answer to your question is no. Overdraft fees, which are generally around $30, are taken automatically from your checking account. They are usually paid back within days and not months. Horowitz states that most overdraft fees are charged to people who overdraft more than 20 times per year. This quickly adds up over $600 per year at $30 per transaction.

The savings are obvious when you compare the fees of small-dollar loans with overdrafting your account.

Horowitz states that if someone borrows $500 for three consecutive months, they will pay less than one fee. It’s a huge difference. Because they offer a better option span>, very small loans can be part of the solution for overdrafts.

According to the Federal Reserve data, six of the 10 largest banks in the country, in terms of branch count, now offer small-dollar loans through Wells Fargo. PNC Bank and Chase Bank are the two largest banks that do not offer small-dollar loans. Chase Bank also confirmed this and stated that they are constantly reviewing their products to ensure they meet the needs of customers in a statement to NerdWallet. PNC didn’t respond to a request for comment.

According to the Federal Reserve, the six largest banks that offer small-dollar loans have combined 15,289 branches in the country. According to the Federal Reserve Bank of Philadelphia, lower-income communities — which are most affected by payday lending — saw their bank branches close down more than those in higher-income areas between 2009 and 2017. This was due to the Great Recession. Bloomberg reports that banks closed 1,915 fewer branches in lower-income areas between 2014 and 2018.

These loans can be accessed via mobile banking apps, and are completely automated. Borrowers don’t need to live in close proximity to a branch to get access to them.

Horowitz states that because these loans can be accessed via mobile online banking, someone doesn’t need to travel far to get them. They don’t need to travel many miles to obtain these loans .”

Another important point to remember: Not everyone can open the checking account required to access these loans. People with bad credit histories, negative balances, or a history of late payments can be denied account applications by banks. These customers can still get small-dollar loans, even though second-chance checking is available.

Payday loans are still popular, even though they have been banned in 18 states, Washington, D.C., and other jurisdictions. This is due to the fact that they are easy to obtain and offer few alternatives. Payday loans are the only loan that doesn’t require credit checks and can be used for short-term purposes by people with poor credit or no credit. A valid ID and proof of full-time work are all required by most lenders.

According to Pew Charitable Trusts analysis, 70% of payday loan recipients use their cash to pay recurring expenses such as rent or utilities. Payday loans are often advertised in a way that provides financial cushion for unexpected expenses. According to the analysis, the average payday loan borrower makes $30,000 annually; 58% of borrowers struggle to pay their monthly bills.

One more bank is offering an alternative that could encourage other banks to offer it. It’s possible to see a future where payday loans don’t monopolize small-cash loan industry.

Horowitz states that small loans from banks are the most competitive threat to payday lenders.

Not all financial institutions offer payday loans as an alternative to banks. Credit unions have offered payday alternative loans (or PALS) for more than a decade. These loans range from $200 to $1,000 and charge no application fees. According to a filing, the National Credit Union Administration (NCUA) created PALS in order to provide credit union members an alternative to high-cost payday loan.

Cash advance apps such as Dave, Earnin and Brigit allow users to borrow small amounts from their future paychecks. These apps do not charge interest, but they may charge fees for processing or speedy delivery. Many apps ask for tips.

The space has seen banks also innovate. All overdraft fees were eliminated by Ally Bank in 2021. Overdrafts less than $50 are not subject to fees at SoFi. Chase Bank charges a $34 per overdraft transaction, up to three times daily for a total $102, but it does not start charging this fee if your account has been overdrawn by more that $50