The Federal Deposit Insurance Corporation (FDIC) most recently concluded a pilot program to get banks to compete with payday loan companies. The final results are in on the small dollar loan pilot program launched by the FDIC in 2008. The program was deemed a success. However, the number of loans made in two years was relatively small and also the parameters for lending were a lot more restrictive than payday loan programs.
Alternatives for payday loans from the FDIC
In a press release, the FDIC called the payday loan alternative program a “Safe, affordable and feasible template for small dollar loans”. Banks within the program reported making a lot more than 34,400 small-dollar loans and experienced default rates considered normal for that type of unsecured loan. Parameters involved a loan amount of $2,500 or less for terms of 90 days or a lot more. The annual percentage rate (APR) was 36 percent or less. Fees were “low” . Proof of identity, address, income and a credit report used to determine loan limits was required for underwriting. “Optional features” integrated mandatory savings or checking accounts and “financial education”. After these requirements were met, applicants would learn whether they could get their money in 24 hours.
Small dollars big money for banks?
Offering consumers a lot more affordable alternatives to pay day loan may not have been the only reason for the FDIC small dollar loan pilot program. An experiment to determine how banks can muscle to the profitable payday loan market may are the aim. Participating banks viewed the pilot program as a “strategy for developing or retaining long-term relationships with consumers” according to the FDIC. Thus, the needs for opening accounts and undergoing financial education.
The FDIC pilot versus payday loans
The FDIC small dollar loan pilot program may have had some elements not mentioned in the release. Bloggernews.net reports that direct deposits, collateral or origination fees—none of which are required for a payday loan, were required for some loans by banks within the program. In two years, slightly a lot more than 30,000 loans were made by banks in the program when payday loan companies make about 100 million loans annually with 93 percent of borrowers paying on time
Discover more data:
http://fdic.gov/news/news/press/2010/pr10140.html
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