Currently, most reputable financial institutions do not offer small-dollar loans. Due to the predatory practices by payday lenders, many in the industry wish to steer clear. However, the regulation surrounding small-dollar loans is turning around on both the state and federal level.
So why are regulatory agencies taking a closer look at small-dollar loan programs? Because quick loans in and of themselves are useful, even critical credit union member services. They’re harmful only when predatory lenders charge anywhere from 300–800% APR on the borrowed sum, which can significantly impact a borrower’s financial viability.
More and more credit unions and other financial institutions are taking an interest in their members’ ongoing financial health. Offering small-dollar loans ensures that members aren’t forced to take their business elsewhere with interest rates in excess of ten times that of what credit unions would offer for the same loan amount.
Underwriting Small-Dollar Loans Isn’t Easy
While one of the primary reasons that most credit unions currently don’t offer small-dollar loans is because of the dubious reputation that other lenders have earned, there are other reasons why quick loan programs aren’t very popular: it’s not easy.
Loan Underwriting Takes Time
The process of underwriting a loan can take time. Unfortunately for small-dollar loan borrowers, time is often a precious commodity. Crises and emergency situations have a nasty way of pitting people against the clock. In times of drought, there’s often an accompanying drought of time.
Underwriting doesn’t just take time—it takes employee time. Loan officers are often well-scheduled as it is; adding another, higher-risk loan service stretches their time even further.
Small-Dollar Loans Aren’t as Fast as They Need to Be
Underwriting and approving a loan takes plenty of time, but so does funding the loan. From appointment to approval to cash in hand, borrowers could be looking at hours or days until they see the money they need immediately.
In trying and stressful times, such as a credit union member crisis, hours or a day could mean all the difference.
But Small-Dollar Loans Are Still Necessary
Regardless of obstacles, credit unions should still consider offering small-dollar loan services to their members. While the quick loan industry’s reputation was tarnished by predatory lenders, the service itself is increasingly necessary.
For the last several years, the number of Americans living from paycheck to paycheck is on the rise. Almost 80% of full-time employees live paycheck to paycheck—that number doesn’t take into consideration people who work part time or are unemployed.
More than half of Americans have less than $1,000 in their bank account. When considering the cost of an ambulance ride, a broken car, or a sudden loss of income, that $1,000 will probably prove insufficient. Credit union small-dollar loan programs can go a long way toward supporting members during trying financial times.
Make It Easier
For credit unions looking to expand the critical member services, small-dollar loans are an important step.
Partnering with a forward-thinking, credit union-based fintech may make it easier to support a small-dollar loan program. With such services, members can have a fully approved loan with immediate access to funds in as little as six clicks and 60 seconds of time. To learn more about small-dollar loan programs for your credit union, follow the links below. Or, if you’re looking for a way to help your credit union members through any crises they have, financial or otherwise, check out our Member Crisis Guide.