Consumer Law

Alternatives to Payday loans: Small Dollar Loans

By Nick Slade

In what is hopefully the start of something, the Federal Deposit Insurance Corporation (FDIC) announced the selection of 30 banks to participate in a two-year pilot project to help identify best practices in affordable small-dollar loan programs that can be replicated by financial institutions.

“Our goal is to identify small-dollar loan programs that are profitable for lenders and affordable alternatives to payday loans and other high-cost loans that are harming consumers and communities across America,” said FDIC Chairman Sheila C. Bair.

I am glad that Chairman Blair recognized the harm payday loans and other high-cost loans do to consumers and communities.

Key features of a preferred small-dollar lending program may include:

Loan amounts of up to $1,000;

Amortization periods longer than a single pay cycle and up to 36 months for closed-end credit, or minimum payments that reduce principal (i.e., do not result in negative amortization) for open-end credit;

Annual percentage rates (APR) below 36 percent;

No prepayment penalties;

Origination and/or maintenance fees limited to the amount necessary to cover actual costs; and

An automatic savings component.

Full post as published by Caveat Emptor on February 07, 2008 (boomark / email).