Wells Fargo has launched a new type of loan that offers customers short-term cash for a flat fee, adding to a slowly growing list of cheaper, less risky financing options for customers short on cash. ‘silver.
The bank announced the new product, dubbed “Flex Loan,” on Wednesday. It’s a $250 or $500 digital loan that customers can apply for on their smartphones and comes with a flat rate of $12 or $20, respectively. Borrowers repay their amount in four monthly installments, without interest.
It is already available in select markets and will launch in all states within the next four to six weeks, bank spokesman Josh Dunn told the Charlotte Observer on Thursday. Flexible loans are only available to Wells Fargo customers – the bank uses factors such as account management practices, term and balances to determine eligibility, rather than using an independent credit bureau.
The loan is meant to be a quick and easy way for customers to directly access funds when they need it most, the bank said in a press release, with no demands, hidden fees, late fees or interest.
The Flex loan is similar to other small, short-term loans offered by US Bank or Charlotte-based Bank of America, sometimes marketed as a cheaper alternative to overdraft fees.
These loans also work as a good alternative to riskier methods of obtaining short-term cash, said Alex Horowitz, chief researcher at The Pew Charitable Trusts. He followed the ways these types of small loans can help low-income bank customers avoid turn to more harmful optionslike payday lenders who charge three-digit interest rates.
“Consumers have turned to (options like) payday lenders because they haven’t been able to borrow small amounts from their bank,” Horowitz said. “But (these loans) are faster, they cost at least 15 times less and they are more affordable. It is therefore a victory for consumers.
An alternative to the personal loan
Horowitz is primarily interested in how small dollar loans like Wells Fargo’s new product contrast with payday loanswhich are short-term, high-interest loans that many consumers take out in hopes of paying it off with their next paycheck.
But those two-week loans often create more problems than they solve, Horowitz said. Exorbitant interest rates – some as high as 400% – can leave borrowers in debt for months.
“We know that when payday loan customers are in trouble, they don’t focus on price or affordability. They focus on speed, ease of access and certainty of approval,” he said.
Compared to these types of loans, Wells Fargo’s low-cost offering costs about 15 times less, he added.
The payday loan is banned in North Carolina, and about half of the states, but there are still a number of other risky, high-interest financing options, Horowitz said. Small dollar loans from big banks could help low-income customers avoid pawnshops or take out other small loans at five times the interest rate.
“All states have pawnbrokers. All states have rent-to-own stores,” he said. “Some customers have repeatedly overdrawn their checking account in order to borrow small amounts of money. These new loans are a more affordable option than that.
Other banks offering small loans
Wells isn’t the only local bank to offer a small, low-cost loan.
In 2020, Bank of America launched a similar product called “Balance Aid”. It allows customers to borrow up to $500 for a fixed amount of $5, paid in three monthly installments.
Other banks offering small-dollar loan programs include Ohio-based Huntington Bank and Minneapolis-based US Bank, which has a handful of branches in Charlotte.
Loans are relatively low-risk products for banks, Horowitz said. “The bank lends to known customers,” he said. “There is a track record here. Even customers with poor credit scores succeed in repaying when they can do so in affordable installments at fair prices. »
Plus, the small size of the loans means they’re still a small liability for banks — compared to something like a mortgage, Horowitz noted, which is nearly 100,000 times larger.
He’s also confident that customers will use these types of loans: When Pew surveyed current payday loan borrowers, eight in 10 said they would switch to using small loans at their bank.
Reminder on overdraft fees
Bank of America and Wells Fargo have also marketed the loans as a friendlier alternative to overdraft fees.
Bank of America, Wells Fargo and other banks began offering more options to low-income customers after their practice of charging overdraft fees increased criticism from lawmakersespecially during the pandemic.
Critics argued that the fees boosted banks’ profits at the expense of customers who could least afford them. In response, several banks abandoned Expenses, reduced them or offered options such as no-overdraft checking accounts or small loans.
Horowitz hopes to see other banks offer similar products. The more banks that offer small, short-term loans, the more likely their customers will be to avoid the worst, he said.
“It can help them avoid other bad options: disconnecting their utilities or having their car repossessed or being evicted,” Horowitz said. “If a small, affordable loan from a bank can help someone avoid these adverse outcomes, that’s a win for consumers, too.”