Low income and no credit loans from the FDIC

More banks are offering small loans to low- and moderate-income borrowers through a program sponsored by the federal government FDIC. The new program was created to show how banks can profitably offer affordable, low interest rate loans to families as an alternative to high-cost credit products, such as payday loans, high interest rate personal loans, and fee-based overdraft protection.

The new program is tailored towards the high number of people in low-income ranges that need small-dollar loans. If they meet certain criteria, they can get a loan.

There are 31 banks in 26 states offering the product from the FDIC, including institutions in Texas, Illinois, and Louisiana. Find a listing of the banks.

Amarillo Bank is one of those that is participating in the Federal Deposit Insurance Corp. (FDIC) program. They are offering short-term, small-dollar, low interest loans of under $2,500 to low-income Americans, many of whom that apply have low or no credit scores. Amarillo Bank has offered small-dollar loans for decades, but most of the banks in the new program first started offering them as part of the new government FDIC program. In total, the banks collectively have offered tens of millions of dollars in loans under $2,500 to hundreds of thousands of consumers.

The primary goal of the FDIC's is to assist the estimated 80 million to 100 million so called under-banked Americans avoid overdraft programs or payday loans. They want these Americans to stop using products that may provide them with quick cash, but carry very high fees or triple-digit interest rates.

According to the FDIC, the goal is to show low and moderate income Americans that there is a much less expensive alternative to high priced payday loans. Also, the organization wants banks to know that small-dollar borrowers represent an attractive new customer base to the banks, while retaining other borrowers, as the loans are still profitable to the banks.

How much can I borrow at what rate?

Banks and institutions like Amarillo Bank offer small-dollar loans to customers of under $2,500 or less. The  average term for the loans is nine months. The interest rate will usually range from  14% to 18% on an annual percentage rate, which is an interest a rate significantly lower than what individuals pay on payday loans or when they over draft their accounts. Another benefit to these government low cost, low income loans is that when consumers take on these small-dollar loan products and pay it back on time, they will improve their credit scores and ratings. Compare that to a payday loan, in which their is no benefit to your credit score even if you pay it back.

 

 

 

What is an overdraft fee?

Banks make billions of dollars from people in so called overdraft fees. With overdraft protection that most people have, consumers can overdraw their savings or checking accounts and banks will cover the transaction with fees as large as $35 for each overdraft, regardless of the size of the draw or how much over their limit they went.

According to the FDIC's, a large percent of bank profits are from overdraft fees, in total about $35 billion in annual fees for the whole industry. And what happens is that these fees are not paid by customers who make a mistake an accidentally overdraw their account, but the banks make billions of dollars from low-income consumers who intentionally overdraw their accounts as a type of short-term loan because they can't cover their basic living expenses and they take out more money to help pay their bills. In effect, overdrafts are a line of credit or type of short term loan that people are using to just pay their everyday bills. Find how to settle debts and overdraft fees.

How does this small dollar and low income loan compare to high interest payday loans?

There are over 23,000 payday lender outlets across the country, and all together they make up the $70 billion payday-loan market. Unfortunately what all too often happens is that low and moderate income individuals, and other who may be struggling, turn to payday lenders who provide them with cash for a large fee.

For example, in the state of California, a consumer can write a check to a payday loan lender for $300 to receive a two-week salary advance loan. These loans generally need to be paid back when the borrower receives their next paycheck. What the $300 covers is the following. It breaks down into a $45 fee for the lender and a $255 loan for the borrowers, which the borrower must repay when he gets his work payment. The bottom line is that equals a 460% annual percentage rate fee for the payday loan.

Unfortunately what typically happens in these cases is that the consumer pays off the short term payday loan by taking out another payday loan, and paying another $45 fee. The industry calls this rolling over the loan, and the consumer can pay hundreds or thousands of dollars in fees.

The fees for these salary advance loans from payday lenders are significantly higher fee than what banks under the FDIC small-dollar program charge for their loans. One bank in the program, Progresso's, offers small loans with significantly lower interest rates. This bank charges a fairly small origination fee and interest fee that when combined, equate to  about a 36% annual interest rate for the loan.

Since it started issuing these loans, Progresso Financiero has made over 30,000 loans averaging about $900 each. The banking institution, with 17 locations and 120 employees, offers borrowers loans ranging from $250 to $2,500 for an average 9-month term, and at a much lower interest rate than payday lenders.

 

 

Banks participate in the small dollar loan program

The list of banks and financial institutions includes :

Small-Dollar Loan Pilot Program Participants

Amarillo National Bank  Amarillo, TX

Armed Forces Bank  Fort Leavenworth, KS

Bank of Commerce  Stilwell, OK

BankFive  Fall River, MA

BBVA Bancomer USA  Diamond Bar, CA

Benton State Bank  Benton, WI

Citizens Trust Bank  Atlanta, GA

Citizens Union Bank  Shelbyville, KY

Community Bank & Trust  Cornelia, GA

Community Bank of Marshall  Marshall, MO

Community Bank - Wheaton/Glen Ellyn  Glen Ellyn, IL

The First National Bank of Fairfax  Fairfax, MN

First United Bank  Crete, IL

Kentucky Bank  Paris, KY

Lake Forest Bank & Trust  Lake Forest, IL

Liberty Bank  New Orleans, LA

Liberty National Bank  Paris, TX

Mitchell Bank  Milwaukee, WI

National Bank of Kansas City  Kansas City, MO

Oklahoma State Bank  Guthrie, OK

Pinnacle Bank  Lincoln, NE

Red River Bank  Alexandria, LA

State Bank of Alcester  Alcester, SD

State Bank of Countryside  Countryside, IL

The Heritage Bank  Hinesville, GA

The Savings Bank  Wakefield, MA

Washington Savings Bank  Lowell, MA

Webster Five Cents Savings Bank  Webster, MA

White Rock Bank  Cannon Falls, MN

Wilmington Trust  Wilmington, DE

 

Credit score is key

If someone takes out a salary advance loan from a payday lender, the fees and interest they will pay back to the payday lenders and banks for overdraft protection do not help build or improve their credit scores or ratings. In toady’s day and age, a failure to build a credit score limits low-income individuals' ability to advance economically. It can prevent them from even getting a job in certain cases.  Find other ways to improve your credit rating.

More banks that offer these small dollar loans have started to set up offices in low- and moderate-income neighborhoods and districts, where foot-traffic will drive more customers. In addition, the FDIC said that many participating banks and lenders are working with non-profit institutions, charities, and community organizations and agencies to help identify potential borrowers who might benefit from small loans and they are encouraging them to apply.

Amarillo Bank calls the program a success. The bank has offered almost 2,000 loans of under $1,000 -- with a total volume of $1.4 million -- to thousands of low- and moderate-income individuals. And the loans are profitable to the bank as well, as the small dollar loans have the same default rates as other categories of loans, and another benefit is that the small-dollar borrowers often become long-term customers of the banks.