Payday loans are a product that’s aimed at a specific need. There are people who need small-dollar loans. In many cases, they have poor credit, so they’re forced to pay the high interest rates on payday loans. The short terms of the payday loans mean that the fees are relatively small, even though the APR is huge. Still, payday loans are controversial and there are those that want to see other solutions in the marketplace.

Back in February of 2008, the FDIC started a two-year pilot project. The idea was to study affordable small-dollar loan programs through traditional financial institutions. The program involved 30 banks ranging in size from small local banks to national banks.

The idea behind the program is to get these banks to experiment with small-dollar loans. Specifically, these loans would:

• Be for no more than $1,000.
• Have a payback period of between a pay cycle (usually two weeks) and 36 months.
• Charge an annual percentage rate (APR) under 36 percent.
• Include no penalty for prepayment.
• Have fees that are limited to cover actual expenses.
• Include an automatic savings component.

The study has gathered a variety of information in the process of this study. The study would consider whether the bank already offers small-dollar loans, whether it would implement a new program, how big the program would be, how it would be structured and marketed, and how the application process would work.

The study is complete, but all of the data isn’t in yet. You can look at data from the first year of the pilot, however.

If the program shows that these programs can work well for banks, it will likely mean options for people who, up to this point, have had to turn to payday loans. It will also put pressure on payday lenders to offer better terms. It will be interesting to find out the results of the study, and to see whether traditional lenders can really compete and even be profitable under the specific guidelines in the program.

Photo via jswieringa