Examples of Short-Term, Small-Dollar Loans

• A payday loan is usually a short-term loan, generally for $500 or less, that is typically due on the borrower’s next payday or when regular income is received from another source. The loans are for small amounts, and many states set a limit on payday loan size ($500 is a common loan limit, though there is a range). To repay the loan, the borrower generally provides authorization for the lender to transfer electronically the full balance, including fees, from a bank, credit union, or prepaid card account. Thus, it is a balloon payment loan, similar in term and requirements to an overdraft check “loan.” An advantage of a payday loan is that it can serve as a bridge between bill due date and payday and can ensure less costly consequences than an overdraft or utility shut-off.

• Consumers often use unsecured consumer installment loans, also known as signature loans, loans of good faith, or personal loans to manage variable expenses, to pay down higher-interest debt, or to finance a special purchase. One advantage of using an unsecured consumer installment loan is that it can help someone with little or no credit history to establish a credit rating.

• Small-dollar consumer loans typically have shorter terms, lower balances, and below-average credit characteristics. They can be viewed as an alternative to other forms of lending, such as payday lending, and, according to the U.S. Department of Treasury, they serve a niche of consumers that may not have many alternatives. The demand for short-term, small-dollar products is high, because many households struggle with income volatility, thin or nonexistent credit files or a subprime score, or lack of access to mainstream financial products that meet their needs. An advantage of small-dollar consumer loans is that they allow consumers to break down large costs and divide their outflows of cash into even, predictable amounts.