The provider and consumer experience with small-dollar loans

The Promise of Small-Dollar Loans

The Challenge

Consumers navigating an unexpected expense, without adequate savings or a strong credit score, are often frustrated with existing credit options. Credit cards are inaccessible to some, and high balances or their cost can deter others. Borrowing from friends and family, a common choice, can strain personal relationships. A trip to a payday lender, an option for many with little credit history, often involves balloon repayments and expensive rollovers that trade one financial challenge for another.

For many consumers living with low and moderate incomes, the one place they have not been able to turn to is their own bank.

Bank-offered small-dollar loans provide a better option and build the bank-customer relationship.

Increasingly offered by major banks and many credit unions, these products are short-term, low-cost installment loans or lines of credit that tend to be more affordable, faster, or easier to access than other forms of credit. For banks and other providers, uptake and repayment of small-dollar loans are exceeding prelaunch expectations, and banks are better able to retain and cross-sell to some customer segments.

While initial signs point to benefits for both the provider and consumer, many people still have questions about the consumer experience so far and why more banks aren’t offering small-dollar loans.

Our Approach

To answer these questions, ideas42 interviewed borrowers who had recently taken out a small-dollar loan from one of the six major banks currently offering a product. Borrowers shed light on the decision to apply for a small-dollar loan, their experience with applications and repayment, and the impact of these loans on their financial health.

ideas42 also spoke to over a dozen market participants and stakeholders to unpack the provider experience with small-dollar loans. Discussions with banks, with and without small-dollar products, offered insight into the barriers and opportunities that banks confront in launching these products as well as their experience delivering these loans.

The Takeaway

Small-dollar loans are providing benefits for consumers and providers. Consumers are finding value in a product that is easy to access and is structured to meet their repayment capabilities. Banks are happy to tap into a large and reliable market and to expand their reach to a wider segment of consumers, with hopes of retaining and cross-selling over time. Banks without a small-dollar loan also have the opportunity to build customer loyalty and provide services to millions more consumers who could benefit from access to small-dollar loans.