The FDIC announced the results of a two-year pilot program designed to help banks offer alternatives to payday loans that would be “safe, affordable and feasible.” Under the test program, the FDIC worked with participating banks to help them offer loans of up to $2,500 at maximum interest rates of 36% — instead of the 400% offered by some payday lenders. The FDIC hopes that banks will adopt the program on a widespread scale offering a viable alternative to payday loans for those individuals seeking emergency credit. But there are few obstacles in the way of convincing traditional banks that the program targeting low-income individuals is worth the risk:
- It may not be profitable for traditional banks to offer payday loan alternatives considering the risk they will take by lending to low-income individuals who are already financially unstable.
- Many low-income individuals probably won’t qualify for the program or may feel discouraged from even applying because the program requires that borrowers provide proof of identity, address, income and complete a mandatory financial education course. On the other hand, most payday lenders only require that the borrower provide their bank account information and/or a paystub.
- Also, many consumers who use payday loans are attracted to the instant access to cash they get when they go to payday lenders. The FDIC pilot program only gives loan approval within 24 hours which is often not quick enough for borrowers facing pressing financial crises that must be addressed immediately.
- And finally, many banks have already tried similar programs in the past and have given up completely on serving these low-income communities which is one of the reasons why the payday lending industry has been successful.