April 22, 2024
Loans

What Is A Small Dollar Loan And How Does It Work?


Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.

Key takeaways

  • Small dollar loans are personal loans offered by select financial institutions for amounts up to $2,500, and are repaid in equal periodic payments.
  • Only institutions that meet the federal and state lending guidelines for the program can receive the small dollar loan grant from the federal government.
  • Approval for a small dollar loan is based on banking activity rather than credit, but eligibility will vary between institutions.

Small dollar loans are a highly regulated low-cost, short-term personal loan with nontraditional underwriting methods. Offered by multiple institutions, including select national banks,  small dollar loans  help borrowers with less-than-stellar credit grow their credit and get the funds they need.

What is a small dollar loan?

Small dollar loans are low-cost, short-term installment loans that are geared toward borrowers with little to no credit history. Offered by national banks, community banks and credit unions, these loans have maximums of up to $2,500. They’re regulated on a federal and state level to ensure that the costs remain low.

Designed to be an affordable alternative to payday loans, small dollar loans can be used for a wide range of expenses and are paid back in regular installments. However, what sets them apart from other forms of lending is the underwriting criteria. Rather than focusing solely on creditworthiness, approval for a small dollar loan is based on routine banking activity, although the specifics may vary by bank.

Examples of small dollar loans

Because small dollar loans are offered by a wide range of institutions, the details of each loan will vary. However, they still must fall within the federal guidelines and not exceed $2,500. To show what a small dollar loan might look like, we outline three examples: the Bank of America Balance Assist Loan, the Wells Fargo Flex Loan and U.S Bank’s Simple Loan.

Loan details Wells Fargo Bank of America U.S Bank
Maximum loan amount $500 $500 $1,000
Repayment term 4 monthly installments 3 monthly installments over 90 days 3 monthly installments
Interest rates None None None
Fees $12 or $20 flat fee $5 flat fee $6 fee for every $100 borrowed
Monthly payments* $130 $168.30 $353.30

*If maximum loan amount is borrowed including fees

How do small dollar loans work?

To ensure nonpredatory lending behavior, small dollar loans are regulated federally and at the state level as part of the Small Dollar Loan (SDL) Program. As part of the program, financial institutions can apply for a small dollar loan grant with the federal government. Part of the agreement ensures that loans made with the funds meet specific requirements outlined by state and federal guidelines.

The interest rates and fees may vary by state, but the APRs can’t exceed the legal limit of 36 percent. Although you may get a higher rate with a small dollar loan than with a traditional personal loan, the rates are much lower than what you might get with a payday loan.

Some states charge a flat fee for the entire loan, while others charge a simple pricing fee or fixed percentage rate. The fee structure can also vary based on the institution that issues the loan.

Small dollar loans must meet a set of specific requirements that have been put in place by the SDL Program. If you’re considering a small loan that doesn’t meet the following requirements,  it’s not an official SDL Program loan and isn’t federally protected.

  • Maximum loan amount of $2,500 or less.
  • Be repaid in installments.
  • Have no prepayment penalties.
  • Be reported to at one of the three credit bureaus.
  • Meet any other affordability requirements set by the financial institution.

State regulations on small dollar loans

Several states have implemented laws that aim to decrease the cost of small loans and provide more time for repayment. This is to prevent consumers from getting trapped in predatory debt cycles. Institutions that offer small dollar loans under the SDL Program must meet all of the stated regulations to qualify for the program and receive grant money.

Your loan and its total cost may vary, as states have differing fee limits and structures for small dollar loans. Some states have fee limits, such as not charging more than $15 per $100 or having a maximum fee of $45, while other states have fee structures based on the total loan amount. Your state’s banking and regulation department should have information on the availability and the specific cost structure of its small dollar loans.

Where to get a small dollar loan

Small dollar loans aren’t as popular as traditional personal loans and aren’t offered at every financial institution. But due to years of development, they’re now more accessible than ever.

Select national banks

Just five years ago, you wouldn’t have been able to walk into a national bank and apply for a small dollar loan. Now, six out of the eight largest national banks are offering these loans to their customers. As of late 2023, this includes Bank of America, Huntington Bank, Regions Bank, Truist, U.S. Bank and Wells Fargo.

If possible, apply for a small dollar loan with the bank you already have an account open with. You’ll be required to open an account to get approved, so the process will be much faster if you go with your regular bank.

If your bank doesn’t offer the loans, you’ll likely need to wait some time after opening a new account to show sufficient transaction habits. Before applying, ask a representative how long your account must be active and what its specific banking requirements are for approval.

Community banks and credit unions

If you’re already a customer of a community bank or a local credit union, check to see if they offer small dollar loans. Just like with a national bank, noncustomers of a community bank must also open an account to apply.

If you’re thinking of going with a credit union, keep in mind that on top of opening an account, you’ll also need to become a member to apply. Most credit unions base membership off of location or occupation, but others are a bit more specific. For example, membership may only be extended to state-employed workers and their families.

Since the membership process can also draw out the application process, consider borrowing from a bank if you need the funds sooner than later.

Bottom line

Small dollar loans are becoming increasingly popular, offering funding to those who need it most. These low-cost loans allow borrowers with little to no credit to borrow and repay sums of $2,500 or less. While small dollar loans may come with a higher cost than a traditional personal loan,  you can rest assured that you’re not borrowing a predatory loan with sky-high rates.

Frequently asked questions about small dollar loans

  • Small dollar loans typically range from $50 to $2,500. The maximum loan amount will vary depending on the institution you borrow from, but it can’t exceed the federal limit of $2,500.

  • Fees for small dollar loans vary by state. Some states will charge a flat fee for the entire loan, while others charge a simple pricing fee based on the amount borrowed and others still charge a fixed percentage rate.

  • Small dollar loans are repaid over several months rather than with the next pay cycle. They also have transparent fees with set rates and more favorable terms compared to payday loans.

    For example, payday loans can come with rates as high (or higher) than 650 percent APR, which can cause a high-interest debt cycle. Small dollar loans, however, have set APR maximums of 36 percent and have additional regulations in place to protect borrowers.



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