Instead, small-dollar loans help consumers quickly access cash from reputable financial institutions such as banks and credit unions. Customers can borrow up to $2,500 depending on the financial institution, and the money is typically borrowed in increments of $100. Small-dollar loan fees have fixed rates with no hidden costs. The rates can be as little as a flat fee of $5 for the entire loan, a simple pricing fee such as $12 for every $100 you borrow, or a fixed percentage rate. While some small-dollar loans can have interest rates as much as 36%, this is still significantly lower than payday loans, which can charge nearly 400% APR. To receive a small-dollar loan, you must pass a credit check. If approved, you will receive your cash in one lump sum. Typically, you can only apply for one small-dollar loan at a time. Once that is repaid, you may face a 30-day waiting period before you can apply again. Rates and repayment periods vary by loan and financial institution. For example, some banks may offer small-dollar loans that are short term with repayment terms that consist of making three equal monthly payments over 90 days. Other small-dollar loans may have repayments of up to 24 months.
Example of a Small-Dollar Loan
Let’s say you need $500 to repair your refrigerator that suddenly stopped working. But you do not have the cash available on hand. So you apply for a small-dollar loan at your local credit union. The credit union charges $12 for every $100 you borrow, for a total of $60. But unlike a payday loan, you won’t pay $60 every two weeks. Instead, you will repay a total of $560 over 90 days. That’s about a $186 payment per month for three months.
Types of Small-Dollar Loans
Installment Loan
Installment loans are small-dollar loans with a fixed interest rate that you pay off in a series of equal monthly payments over several months.
Single-Payment Loan
This is a short-term, small-dollar loan that is paid back in a single payment and has a one-time fee that is typically less costly than missing payments, bouncing checks, or neglecting bills.
Deposit Advance Loan
With this type of small-dollar loan, your bank or financial institution gives you a loan, typically about $500, in advance. The bank then deducts the money and a service fee from your next direct deposit.
How To Get a Small-Dollar Loan
To be eligible for a small-dollar loan, you typically must have a credit check and meet other requirements, including that you:
Are age 18 or olderHave an active checking account open for a minimum period of time, such as six months or one yearHave a positive account balance and make regular monthly depositsDo not currently have an open small-dollar loanHave valid identification and proof of income
Applying for a small-dollar loan is often quick, easy, and convenient. Many financial institutions allow you to apply online. To begin your application:
Access the application online or through the bank’s mobile appApply for the amount you want to borrowSubmit the application
If your application is approved, you will have access to cash within minutes.
Pros and Cons of Small-Dollar Loans
Pros Explained
Longer payment times than payday loans: Small-dollar loans are short-term loans that are paid back over several months instead of by your next payday.Rates are fixed with no hidden fees: The fee is often a fixed rate and lower cost than payday loans.Quick and easy application: Many financial institutions provide a convenient mobile or online application process.Typically, no collateral is needed: Most small-dollar loans are unsecured and do not require collateral to borrow money.
Cons Explained
You must have an open checking account: Many banks require that your checking account be at least 6 to 12 months old and show a history of recurring monthly deposits.Approval requires a credit check: Unlike payday loans, approval amounts and interest rates may depend on your credit history. Approval does not depend on the amount of your paycheck alone.Can damage your credit score: Your payment history must be reported to at least one major credit bureau. Any non-payment or late payments will likely negatively impact your credit score.
