Just five years ago, no large banks offered small installment loans or lines of credit to checking account customers with low or no credit scores but today thanks in part to changes in federal regulations to help consumers, six of the eight largest banks, measured by their number of branches, do. These loans are safer and more affordable for customers who previously would turn to high-cost payday loans or other alternative financial services, such as auto-title loans and rent-to-own agreements.
Regions Bank, Truist, and Wells Fargo began offering these consumer-friendly loans in late 2022, joining Bank of America, Huntington Bank, and U.S. Bank. These six large banks combined operate nearly 17,000 branches, or 23% of all bank branches in the U.S.
They are offering loans in amounts up to $500, $750, or $1,000 depending on the bank, which are large enough for customers to replace high-cost non-bank loans with affordable credit. Borrowers can access the funds in a few minutes or less, because they are automatically pre-approved or complete a quick application and the proceeds are disbursed into their bank account almost instantly. All the programs give customers at least three months to repay in equal installments.
Pew has previously noted these new bank-issued loans are priced at least 15 times lower than payday loans, offering hundreds of dollars in savings to a typical borrower. But the savings could be even larger for those who use other alternative financial services, such as auto title loans or rent-to-own agreements. Nineteen states have auto title lending, allowing state-licensed businesses to make loans secured by a borrower’s vehicle, usually at annual interest rates of 200-300%. Pew has found that, like those who use payday loans, most auto title loan borrowers pay more in fees than they originally received in credit. Rent-to-own stores operate in every state and primarily serve customers with weak or no credit scores. Buying and financing a computer, appliance, furniture, or other item from one tends to cost about three to four times as much as buying it from a mainstream retailer, so a $500 appliance would typically cost $1,500-$2,000 when factoring in the financing. But the new availability of bank small-dollar loans gives many consumers a much less costly option to borrow from their bank and use the proceeds to buy these items from conventional retailers.
Recent Federal Deposit Insurance Corp. (FDIC) data show that 95% of American households hold accounts with banks or credit unions. That includes all payday loan borrowers, and most customers who use auto title loans and rent-to-own. If customers using those or rent-to-own agreements for common purchases like appliances or computers switch to borrowing from banks, the savings for someone earning $30,000 annually could exceed 1-2 weeks of income.
The new, accessible loans could also provide relief to consumers who have not previously turned to high-cost credit. Events like eviction, auto repossession, and utility disconnection harm millions of Americans annually, and gaining access to affordable credit from their bank could help them avoid that turmoil. The loans could also help those who frequently overdraft their bank accounts and rack up steep fees as a result, allowing them to save hundreds of dollars annually.
The new loans were made possible in part by the regulatory certainty stemming from careful, forward-thinking joint guidance in May 2020 from the Office of the Comptroller of the Currency, FDIC, Federal Reserve Board of Governors, and National Credit Union Administration. The guidance welcomed automation and low-cost, flexible loan underwriting criteria while prioritizing affordability and consumer well-being. Now, the households who need the most help are starting to get it.
Alex Horowitz is a principal officer and Gabe Kravitz is an officer with The Pew Charitable Trusts’ Consumer Finance Project.