Small-dollar loans are an extremely valuable product and provide an important source of credit to millions of Americans. Some types of small-dollar loans include single payment loans and multi-payment loans offered through retail store branches and online. Loans may be secured with an auto title or unsecured, and terms can range from two weeks to two years in general. The types of small-dollar loans available are dependent upon existing state statutes and vary widely from state to state.
Restricting Small-Dollar Loans Hurts Consumers’ Financial Well-Being. Efforts by legislators to regulate the terms of small-dollar loans (such as by imposing price caps on fees or limitations on use) typically produce negative unintended consequences that vastly exceed any social benefits gained from the legislation.
Restrictions on small-dollar loans, such as through outright bans or rate caps, result in increased credit problems for consumers. Some consequences of restricting small-dollar credit to consumers:
When states ban small-dollar loans, the marginal circumstances of consumers are only further aggravated.
Small-Dollar Loans Benefit Communities. Small-dollar lenders provide essential financial services to many individuals in underserved communities throughout the nation. By providing loans to those who cannot otherwise access traditional forms of credit, small-dollar lenders help communities and small businesses thrive and allow money to be reinvested in local businesses and neighborhoods where it is needed most.
Small-Dollar Loans Offer a Valuable Service; Banks and Credit Unions are No Substitute. Banks, credit unions, and credit card companies are generally unwilling to offer small-dollar loans to individuals because they do not view the product as profitable. To date, almost all attempts to create small-dollar loan alternatives have either been charity-based, required government subsidies, were unavailable to the general public, or were unprofitable or unsustainable.