For When Ends Don’t Meet: A Scan of Lending Products for Borrower Needs

Debt and access to affordable credit products are essential factors of wealth accumulation and financial liquidity in the United States. Low and middle income communities’ access to housing, education, business creation, even medical care, are frequently contingent upon access to affordable lending services. Loans are not the only option for when someone is struggling with cash flow issues (see WeProsper's Resource Guide for help with lowering bills and additional income sources), but there needs to be safe, viable options when people have no where else to turn. Due to many lenders deciding to close their brick-and-mortar locations in Illinois rather than abiding by the Predatory Loan Prevention Act’s (PLPA) 36 percent APR cap, we observed a need for understanding the ongoing needs of communities that previously utilized these loan shops and may need products in the future.

We undertook a scan of 51 current lending options to learn more about how many products were available to meet the primary small-dollar borrowing needs of low- to moderate-income (LMI) communities and to better illustrate what gaps are left to fill. This analysis consists mostly of products offered by credit unions and large banks as well as some nonprofit and fintech options.

The visualization below sorts the products into categories of need cases as illustrated by the 2013 Financial Health Network report, Know Your Borrower, The Four Need Cases of Small-Dollar Credit Consumers. Based on 31 in-depth interviews and a panel survey of more than 1,100 borrowers, this piece provides a useful framework for the different reasons consumers commonly look to small-dollar loans.

While many loans are assigned to more than one need case, there are still important differences between these borrower profiles. First, some types of loans, like all credit building programs, second mortgages, and many credit cards, are only suitable for Planned Purchase, as they are geared toward the longer term. According to the report, these borrowers need larger sums (63 percent of them take a loan for more than $1000) but borrow money less frequently and are less likely to have a poor credit score when compared to the other need cases.

By contrast, the overwhelming majority of borrowers falling into the need cases of Misaligned Cash Flow and Exceeding Income usually take out smaller sums (less than $500), frequently resort to borrowing, and are more likely to have poor credit scores. For these reasons, we assigned to these profiles mainly products with a minimum loan amount not exceeding $500, products with shorter terms or without specific credit score requirements as well as products like Wells Fargo Bank’s Early Pay Day, Wintrust Bank’s Ready Now Credit Line and Huntington Bank’s Standby Cash Line of Credit which grant existing clients quick and safe access to funds. Further, because the need case of Exceeding Income comprises those who do not earn enough money to meet their needs and rely on frequent loans for everyday expenses, products that have clear limitations as to the number of times they can be granted, like the Jewish Free Loan or Cash-in-A-Flash by Great Lakes Credit Union, can be ill-suited for this category.

Finally, the Unexpected Expense need case is the middle between Planned Purchase and Misaligned Cash Flow/Exceeding Income, with borrowers seeking smaller sums ($500) as well as larger ones ($500-$1000+) to front a one-time expense. Timeliness of the loan product is also an important factor given the unexpected nature of the need case.

For this scan, we only included products that charged less than 36 percent APR and seemed to follow safe practices for consumers. The first step for calculating Annual Percentage Rate or APR is adding the loan's total fees and interest together. Some loan products at first glance offered low interest rates but did not include additional fees into their rates, making their products more expensive than what we would recommend.

In addition to APR, the table also includes the loan amount, repayment term, and common loan requirements that are important factors for borrowers when considering a lending product. A check mark under a given loan requirement indicates that it applies to the loan, an X indicates no, and a question mark indicates it was unclear whether the requirement applied to the product based on the information we could obtain from the lender’s website or calling their customer support. It should also be noted that this list of products and product features is updated as of January 2024, but this information frequently changes.

The first loan requirement indicates if lenders will ask borrowers to provide proof of income or employment history, e.g. a recent pay stub or W2 tax form from the previous calendar year. The second loan requirement is whether or not access to loans can be restricted to existing clients or members of credit unions. For instance, products like Balance Assist by Bank of America or My Chase Loan by Chase are only available to customers of those banks. The third loan requirement we included relates to credit score and credit checks. Many borrowers are anxious to know whether their credit history and score (or lack thereof) will prevent them from qualifying for a loan, or whether applying for one will result in a hard credit inquiry and thus potentially lower their score. The last requirement listed was whether borrowers can use an ITIN (individual taxpayer identification number) in lieu of a social security number in their loan application. This is important for borrowers who are neither citizens nor permanent residents and whose access to financial resources in the U.S. may thus be limited. While requirements vary widely from product to product, we aimed to summarize and standardize the information available for each loan according to parameters that are crucial for borrowers and would help inform their decision-making process.

Most of the loans available in communities came from banks and credit unions, with a smaller number coming from nonprofit CDFIs and fintechs. Both banks and credit unions have specific commitments to the community, whether it be through the Community Reinvestment Act (CRA) for banks or the not-for-profit mission of credit unions. However, it should be noted that these financial institutions are not without faults and could better reach LMI communities and communities of color.

Prior to 2018, no large banks offered small installment loans or lines of credit to checking account customers with low or no credit scores. Since then, large banks like Bank of America, Huntington Bank, and U.S. Bank have made overtures towards small-dollar loan consumers by designing products that address some of the issues these consumers face. Some of these product features include quick, online application processes, looking at income or deposit history rather than credit score, and no unexpected fees. These lending instruments are a step in the right direction to address the affordable small dollar lending gap and foster trust with LMI consumers as well as BIPOC communities that have been marginalized in the past.

Credit unions can also play a crucial role to serve those most affected by predatory lenders. While far from the billions in loans churned out by predatory lenders, credit unions issued $227 million in loans through the administration’s Payday Alternative Loan (PAL) program in 2022, topping the previous record of $174 million, set in 2019, by 30 percent. Credit unions also have exhibited a greater range of alternative product diversity for those who most likely frequented predatory lenders. According to our recent scan, Self-Help Federal Credit Union and Great Lakes Credit Union offer some of the most diverse set of products for Illinoisans, including their credit builder loans and secured credit cards.

Credit unions and other CDFIs are an essential resource, yet credit unions are greatly limited in scope and the number of total CDFI awards each year is dwarfed by the size of the need. Not only is additional funding necessary, but creative solutions that leverage different sources of capital are also sorely needed. Nonprofit lenders are a space we would like to see explored more, but there are currently limited options.

Fintechs bring the added advantage of providing access to communities historically underserved by banking institutions and offer a great opportunity for innovation and access; however, oversight is limited and inconsistent. The team was concerned about listing some of the fintech products we found, given some of the practices we learned about during our scan (e.g. promoting a low interest rate while charging additional membership or instant transfer fees). As a result, several were left out of our list of products. We hope that over time additional information and federal oversight will ensure the safety of more fintech products.

Overall, we found that the products included in our scan catered to certain need cases more than others. Planned Purchase and Unexpected Expense had the greatest number of options, 40 and 38 products respectively. In comparison, need cases Misaligned Cash Flow and Exceeding Income, which typically describes those who need small dollar lending products, had 20 and 16 suitable products respectively. Our analysis suggests that borrowers with frequent, short-term time constraints are still drastically underserved. We found that few of the products address the issue of timely availability of loaned funds. Quick fund access is crucial for people who are regularly experiencing misaligned cash flow or have expenses that exceed their income. For these people who are living paycheck to paycheck, a missed payment could have catastrophic consequences.

In addition to many of these products being unable to meet the time constraints of customers, the design of some of these products is flawed for LMI households in other ways. For example, stipulations requiring a mandatory minimum on account balances or a required account balance for a period of several months put these products out of reach of those customers whose financial responsibilities equal or outweigh their incomes. These borrowers are most dependent on short-term lending and other alternative financial services, yet these requirements prevent them from using products that are supposed to cater to their needs.

It should also be taken into account that experiences vary across racial and ethnic groups. This product scan and need cases do not reflect those differences and more investigation is needed to highlight the different lending preferences and practices across different communities. Ignoring cultural differences, past traumas, and discrimination associated with financial institutions is a disservice to them all. More resources must be devoted to illuminating the overlap and differences between the small dollar lending needs of BIPOC communities if appropriate solutions are to be crafted.

There also remains a need for creating trust as well as unbiased feedback loops between financial institutions and consumers in order to maximize the effectiveness and uptake of affordable lending products. To this end, CivicSpace, a New America Chicago initiative, has undertaken community-engaged research to determine what features small dollar loan borrowers might value in lending products that promote financial growth, with an emphasis on Black and Latino/a borrowers. Our analysis of community design sessions with Illinois residents who had experience with small dollar lending identified three common product features that were our participants’ priority overall regardless of any need case:

1. Clear, simple, and quick loan application processes with options for borrowers with low credit scores;
2. Flexible loan payment schedules and amounts per month;
3. Loan products that help build credit scores over time.

Financial institutions should consider these lending practices when designing their products to better serve and attract consumers. Creating products that actually fit borrowers’ needs will not only help the borrowers weather financial hardships, but lenders will also cultivate better relationships with their customers who will be more likely to return to the lender for other products as well.

Prior to the PLPA, predatory lending has negatively impacted Chicago’s LMI communities and communities of color by charging usurious interest rates and hidden fees, most notably on short-term small dollar loans. Although great strides have been made to protect vulnerable consumers from predatory lenders, much work has yet to be done to open pathways for accessible and affordable small dollar borrowing. The key finding identified by this analysis is that borrowers need options for short-term small dollar loans with simple and clear approval processes that put money in their pockets within a timeframe that reflects the pressures experienced by LMI households. This is an urgent need that requires collaboration from policymakers, industry leaders and nonprofit partners to develop innovative, creative solutions. To see a more in-depth discussion of our policy and practice recommendations intended to tackle these issues, please give our Designing Better Small Dollar Loans report a read.