Can Banks Provide an Alternative to Payday Loans? Local Lenders Aim to Attract 'Underbanked'
May 7, 2014
Times-Picayune (New Orleans)
Efforts by payday lenders in Louisiana to dodge a crackdown on short-term loans have rekindled the debate about traditional lenders offering small loans and other products tailored for low-income borrowers with limited bank access.
Liberty Bank began to offer $500 to $2,500 loans in 2008 as part of a Federal Deposit Insurance Corp. (FDIC) pilot program that encouraged lenders to make short-term, low-dollar loans with an annual percentage rate cap of 36 percent. A $500 advance might cost $680 total over a year. Liberty Bank has continued the program, with loans that start out at a 19 percent interest rate and are paid back based on what the borrower can handle. Liberty also plans to launch a forced-savings product as an alternative for borrowers, as well as a financial literacy program for customers to take before being approved for a larger loan.
The FDIC program was meant to offer a more affordable alternative to payday loans, which typically charge renewal fees that can trap borrowers in a cycle of debt. Most banks do not see small-dollar loans as a profitable enough product, however. Regulators are pushing banks to offer more options for underbanked consumers; but banks say new, tougher lending rules make it more difficult and costlier to offer alternative products.
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