New Laws, Lenders Improve Access to Affordable Small Loans | Smart Change: Personal Finances
Inflation has particularly affected people who are already struggling to fit gas in their tanks and groceries in their refrigerators. For many, a payday loan may seem like the only way to get the money needed.
In recent years, however, as more states impose restrictions on risky short-term lending, new lenders have emerged offering small, lower-cost loans, making it easier than ever before to find an affordable loan that won’t drag you into unmanageable debt. .
In some states, new laws mean better loans
There is currently no federal law for maximum interest rates on small dollar loans; rather, states decide whether or not to cap payday loan rates. Therefore, the cost to borrow a few hundred dollars often depends on where you live.
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In recent years, four states — Colorado, Hawaii, Ohio and Virginia — have passed laws that effectively reduce the cost of small loans and give borrowers longer repayment terms. A study by The Pew Charitable Trusts published in April found that even under the reforms, payday lenders were still operating, but with more secure loans.
Although some new lenders began doing business in these states once the laws took effect, the main impact was that existing payday lenders consolidated their storefronts and made their loans more affordable, says Alex Horowitz, director of research at Pew.
National banks and local credit unions step in
A bank or credit union may not have been your go-to for a small loan in the past, but it could be today.
Seven major banks have started offering or announced plans to offer small-dollar borrowing options with low annual percentage rates in recent years, Horowitz said, including Bank of America, Wells Fargo and Truist. These loans are available to existing bank customers nationwide, regardless of state interest rate limits.
Banks primarily rely on customers’ bank history rather than their credit scores to determine if they qualify for a small loan. The loans – which start from $100 – are usually repaid in monthly installments at annual interest rates no higher than 36%, the maximum rate an affordable loan can have, according to consumer advocates.
“The fact that banks start offering small loans could disrupt the whole payday loan market,” says Horowitz.
Local credit unions have membership requirements and maintain lower profiles than payday lenders, so they’re often overlooked by people who need cash fast, says Paul Dionne, director of research at Filene, a think tank that aims to help credit unions serve their communities.
But if you can walk to your local credit union, chances are you’ll qualify for membership, he says.
This is because credit unions often serve people who live or work in their communities. These organizations strive to provide financial inclusion by tailoring their products, such as loans, to better meet the needs of their customers, Dionne says.
“Credit unions are getting better at having the best product and not saying no and figuring out what’s the best fit for that person coming in,” he says.
Other Borrowing Options
Even in states where laws seek to ban payday loans altogether, people are able to find alternatives to risky borrowing, says Charla Rios, researcher of low-cost loans and debt at the Center for Responsible Lending.
You may be able to work out a payment plan with your utility company or borrow from a friend or family member, she says. Here are some borrowing options to consider before getting a payday loan.
Payday advance. Some companies, including Walmart and Amazon, are giving their employees early access to a portion of their salary as benefits. It can be an interest-free way to borrow money if your employer offers it, but since the repayment comes from your next paycheck, it’s best to use it sparingly.
Cash advance applications. Apps like Earnin and Dave let you borrow a small amount of money, usually $25 to $200, before payday. They sometimes charge a fee for instant access to your money or ask for voluntary tips. They also take reimbursement from your next paycheck.
“Buy now, pay later.” For necessary expenses, a “buy now, pay later” loan allows you to purchase an item with partial payment only. You pay the balance in equal installments, usually over the next six weeks. This type of financing can be interest-free if you pay the full balance on time.
Low interest installment loans. Depending on your credit score and income, you may qualify for an installment loan with an APR below 36%. These loans have amounts ranging from $1,000 to $100,000 and are repaid over longer terms, usually two to seven years. Online lenders who offer bad credit loans often pre-qualify you for a loan using soft credit, allowing you to compare loans without affecting your credit score.