Need $100 fast? These lower-cost loans can help.

Half of Americans can’t afford unexpected expenses, so what happens when they need car repairs or their job sends them home early for a week? For millions, the answer is often a high-cost payday loan that typically carries a very high interest rate.

But after years of advocacy by consumer groups and new federal laws, better options are now available. Some major banks now offer small dollar loans at rates much cheaper than payday loans. As of 2018, six banks — Bank of America, Huntington Bank, Regions Bank, Trust, US Bank and Wells Fargo — allow checking account holders to take out short-term loans of $10 to $1,000, making it a financial emergency. Be more affordable to deal with or shop.

“They don’t have to travel to a branch or wait for an online lender to review an application and transfer funds,” Pew Charitable Trusts recently wrote. Reports. “Instead, customers complete short requests through the bank’s website or mobile app, and the bank deposits the funds, typically within minutes, into the customer’s existing checking account.”

Typical interest rates on such products, sometimes called installment loans, can be as high as 18%. But it is less than approx. 21% average annual percentage rate Today on credit cards, and they are much cheaper than short-term financing offered to people with poor credit, such as payday, car title or pawn shop loans.

Compared to such options, a small bank loan is about 15 times cheaper, Alex Horowitz, who leads Pew’s consumer finance research and author of the lending report, told CBS MoneyWatch.

“A payday loan costs about $500 in fees to borrow $500 for four months. Banks are charging $30 in fees,” he said. “The upside is huge because low-income households didn’t have good options to borrow money in the past. And now they do.”

Payday loan math

The Federal Trade Commission offers this. Example How fast can payday loans become unaffordable? Suppose a person borrows $500 from a payday lender. The cost of the loan is $15 per $100, so the borrower writes a check (or authorizes a bank withdrawal) for $575, due in two weeks’ time. If they can’t pay it when the two weeks are up, the lender tacks on $75 to roll it over for two more weeks, bringing the total owed to $650. So borrowing costs from $500 to $150 a month – up to 360% APR.

Some states have moved to regulate these loans, with 18 states capping APRs at 36 percent or less, according to the Center for the Responsible. To lend.

It doesn’t take a financial disaster to drive people into debt. In a 2012 survey, the majority of borrowers said they used payday loans for everyday expenses, such as food, rent or utility bills. Only 16% said they had an emergency expense, and 8% said they used the loan for “something special.”

“Many Americans don’t have much margin for error and need a little help when they get fewer hours at work in a week or have an unexpected expense,” Horowitz said.

Payday loans have one big advantage: they’re the fastest way to get money if you’re desperate.

“Payday loans are expensive, they have unaffordable payments, they leave people in debt much longer than advertised, but they are quick,” Horowitz said.

Until recently, banks generally shied away from offering small-dollar loans. It was not clear that it was legal for banks to offer loans without pulling a credit report, the cost of which outweighed the potential benefits of lending a small amount to a financially strapped customer.

But later Guidance from financial regulators In 2020, some banks started offering these products, which rely heavily on automation and checking the customer’s account history. Horowitz said that checking how often a consumer makes deposits and withdrawals is often a better indicator of whether they can pay back a few hundred dollars than a traditional credit report.

Because the process is so automated, there’s no way to apply, Horowitz noted — a person logs into their bank account, and they’ll see the option if they’re eligible to apply for a loan. “Banks want to show these loans to people who qualify for them, not to people who don’t,” he said.

Some credit unions offer a similar product called a Payday Alternative Loan. Still, Horowitz said tens of millions of Americans don’t have affordable borrowing options in a pinch, and Pew is pushing for more banks to offer the option.

“It should be a universal product in the banking system,” he said. “Millions of borrowers could save billions of dollars, and such loans could replace high-cost loans.”

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