There is no denying that small-dollar loans are popular. People need them to cover not too large expenses that arise unexpectedly. Each of us at least once had to repair a suddenly broken car or felt confused receiving a medical bill. One way or another, the need to borrow 1,000 dollars urgently is familiar to each of us. Some are lucky, as they can ask their parents or friends for help. Others are forced to look for solutions that will allow them not to involve loved ones into their financial problems.
Moreover, federal agencies such as the Office of the Comptroller of the Currency, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corp., and the National Credit Union Administration confirmed the growing interest in small-dollar loans. Let's figure out what small-dollar loans are and how they work.
What Is Small Dollar Loan
The term "small-dollar loans" encompasses several forms of loan products, such as payday loans, auto title, and small installment loans. Small-dollar credit products feature limited loan terms and often short repayment periods. Small-dollar loans can be both secured, like title loans, and unsecured, like payday loans.
Small-dollar loans are used most often to cover unexpected expenses. However, there are a large number of borrowers who take out small-dollar loans to cover current expenses such as paying utility bills, renting a house, or even buying new shoes or study materials. In addition, small-dollar loans are used to pay off other loans.
At the moment, private lenders offer small dollar loans for bad credit. Since 2020, some banks have also provided such loan products, but they do so rarely and often reluctantly, despite proposals from federal regulators. Moreover, banks, credit unions, and other financial institutions are wary of small-dollar loans due to regulatory uncertainty and changing views of financial regulators in this area.
How Small Dollar Loans Work
The hallmark of small-dollar loans is their speed. Most often, the borrower can access the necessary funds within 24 hours. This makes them really something of a lifeline in difficult financial circumstances.
Another advantage of small-dollar loans is their tolerance for credit history. No matter how high or low a borrower's credit score is, they can qualify for such a loan. Small-dollar lenders rely on the income of the borrower, leaving a credit history as support. At the same time, traditional forms of loans are based precisely on credit rating.
Small-dollar lending deals with small amounts. This is suitable for people who do not need large loans, such as personal loans, but still need money. And given the speed of obtaining small-dollar loans and their low requirements, such loans become a really necessary financial product.
Alternatives For Small Dollar Loans
Small-dollar lending is somewhat exclusive and has no alternatives that could completely replace them. Responsible small-dollar loans can get rid of financial problems within a day. Unfortunately, other loans cannot boast of such speed. Of course, there are expensive payday loans and high-cost installment loans, but this does not make them less popular, and banks and credit unions have been slow to come up with alternatives.
However, borrowers may consider the following options for obtaining money:
Borrowing From Friends
Perhaps this is the first thing that each of us thinks about when faced with a financial problem. Loans from loved ones most often do not require the payment of interest rates, and they can hardly be called high-cost loans. In addition, friends can be more loyal creditors and not set too clear deadlines. However, delayed debts can negatively affect a relationship.
You can take personal loans from a bank or any other financial institution that provides loans. Such a loan provides a wide range of amounts that can be borrowed and various long repayment periods. But the borrower needs to have a good credit rating to get a personal loan with good conditions. And some institutions may even refuse to issue a personal loan to those whose credit history is bad.
Credit cards are a convenient way to get some money here and now, especially if you already have one. If not, it's easy enough to get it. In addition, some cards offer grace periods during which borrowers do not have to pay to use the money. However, the interest rates for cash withdrawals can be really high.