If you need a small loan fast, where can you turn? “Start with your bank,” says Jonathan Miller, Deputy Director in the FDIC’s Division of Depositor and Consumer Protection (DCP). “Too many people go to companies such as car title lenders, payday loan stores and pawnshops, because they don’t know that the vast majority of banks offer small-dollar loans at better rates and terms than what nonbanks provide.” That’s among the key messages from two new studies by the FDIC, both based on surveys conducted in 2011.
One survey revealed that about one in five households that use car-title lenders and other alternative providers for credit did so because they mistakenly thought banks only made large loans, like mortgage loans or auto loans, and not small loans. “The survey showed that many consumers also think they won’t qualify for loans made by banks, and that may not always be true,” added Susan Burhouse, an FDIC Senior Consumer Researcher.
The other found that about eight out of 10 banks do, in fact, offer small, unsecured personal loans. Those institutions offered loans under $2,500 with repayment terms of 90 days or longer, annual percentage rates (APRs) at or below 36 percent, and loan approvals in less than 24 hours.
“Results from both surveys suggest that consumers who want a small loan should find out if their bank or another financial institution nearby can offer that product and on better terms than those of nonbank loans,” said Sherrie Rhine, a Senior Economist with the FDIC.
In addition, in 2008 the FDIC began a two-year pilot project to review affordable and responsible small-dollar loan programs in financial institutions. The FDIC pilot demonstrated that banks can feasibly offer reasonably priced loans as an alternative to high-cost credit products, such as payday loans or overdrafts.
“Most banks offer an option to borrow small amounts of money on reasonable terms,” said DCP Director Mark Pearce. “Consumers should explore options at their bank before going to alternative lenders that may offer small loans that are easy to get into but can be costly and hard to escape from because the loans need to be repaid in full in a short time — typically a couple of weeks — or be rolled over into a new loan with additional fees.”