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Payday Loans Out, Small-Dollar Bank Loans In?

June 28th, 2010 · No Comments · Banking, Budgeting, Consumer Info

by Kristy Welsh

(Last Updated On: February 23, 2017)

Arizona recently became the 16th state in the nation to boot payday lenders who force borrowers into a viciously expensive borrowing cycle. However, thanks to the success of an FDIC pilot program, small emergency loans may not be a thing of the past, just at much lower interest rates. This would be welcome news to Arizonans on tight budgets who need emergency cash but cannot afford conventional bank loans.

For 10 years, payday loan companies in Arizona have lured in customers with instant cash loans that don’t have to be paid back until the borrower’s next payday. There’s just one catch: annual percentage rates of more than 460 percent. This makes it hard to pay loans back in a timely manner, often forcing borrowers to take the loans out again, paying only on the interest week after week, month after month.

“They are terrible loans,” says Susan Lupton, a senior policy associate for the Center for Responsible Lending. “There has not been a new state that has authorized payday lending in years, and states are continually looking at ways to cut down shops or get rid of payday lenders altogether.”

Thankfully, these predatory lenders have just a couple of days left to milk the system in Arizona. The law allowing payday lenders to operate there expires at the end of June. (Though it is worth noting these same lenders will be allowed to continue offering title loans that allow borrowers to take out loans with their cars as collateral.)

Of course, all of this begs the question: What are cash-strapped individuals and families to do in emergency situations, particularly those who do not qualify for conventional bank loans?

Enter the “Safe, Affordable and Feasible Template for Small-Dollar Loans.”

Based on a 2-year pilot program with select banks, the FDIC says small-dollar loans can be a win-win – lucrative for banks and helpful to borrowers who may not qualify for higher-dollar conventional loans. Capped at $2,500, these loans would carry interest rates of no more than 36 percent. It remains to be seen whether this pilot program will be implemented on a widespread basis.

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