Embedding Behavioral Science in Small-Dollar Loan Design

Increasing Access to Affordable Short-Term Liquidity


  • When people can’t make ends meet or need to pay for an unexpected expense, they often turn to expensive options like payday and title loans that further exacerbate existing inequities.
  • Small-dollar loans represent an affordable, consumer-centric alternative, but behavioral barriers often prevent people from accessing them.
  • Behavioral design can help address these barriers and give more consumers access to the credit they need.


The Challenge

Most people across the United States struggle to cover an unexpected $400 bill, despite the average emergency expense of $1400. Covering these expenses is especially challenging for families of color, as they often have smaller savings cushions to help them withstand financial shocks. Without cash on hand, people have to make difficult choices or rely on expensive options to make ends meet, like using payday loans or overdraft services. While a salve in the moment, these options can leave people worse off in the long run. This particularly affects people of color, who more often incur overdraft fees and are disproportionately targeted by payday lenders.

Small-dollar loans, which are short-term, low-cost, installment loans of generally $2500 or less, provide a welcome alternative to the more expensive options. These loans are also usually faster and easier to access than payday loans and related options. Despite a growing number of banks and credit unions offering small-dollar loans, behavioral barriers prevent their wider use, including a lack of knowledge about these types of loans, assumptions about who gets approved, or challenges in the application processes. A lack of trust in financial institutions, especially among people of color, also contributes to low uptake.


Our Approach

In order to develop insights relevant to a range of providers, we worked with five financial providers, non-profit lending organizations, financial opportunity centers, and four financial networks representing over 1,000 credit unions. We also interviewed customers of a credit union that predominantly serves low-to-moderate income people and people of color. These conversations allowed us to identify common behavioral barriers to applying for small-dollar loans, paying particular attention to barriers faced by low-to-moderate income people. 

Based on these barriers, we developed a set of design principles aimed at helping financial institutions better craft small -dollar loan products.



Through structured interviews with low-to-moderate income customers eligible for small-dollar loans, we identified five main behavioral barriers preventing Americans from applying to get these loans:

  • Scarcity: Customers confronting immediate needs have limited bandwidth to consider new options for handling financial shocks or to navigate cumbersome processes.
  • Mental Models: Customers have existing perceptions about formal loans that keep them from considering a small-dollar loan.
  • Ambiguity Aversion: Customers are unsure about their eligibility or their approval odds for small-dollar loans and turn to more certain options, even if they would be eligible.
  • Trust: Customers may not trust traditional financial institutions.
  • Hassle Factors: Customers get derailed by complexities in the application process.

We then employed a behavioral approach to combat the common barriers holding back customers. In Increasing Applications to Small-Dollar Loans: A Behavioral Design Guide for Financial Providers, we lay out evidence-based tactics that draw on conversations with customers, financial providers, and financial organizations, as well as decades of behavioral science research.



Small-dollar loans are a potentially important tool for people in times of need. Many financial institutions are newly offering these products, and face hurdles to attracting low-to-moderate  income customers who are already using other means of borrowing for emergency needs. Providers that adopt behavioral design principles can deliver a product that meets its full potential, crafting a service that marries the responsible credit terms of the small-dollar loan with the convenience of expensive alternatives.