Bank of America will begin offering small, short-term loans to cash-strapped customers, the Charlotte-based bank said on Thursday, a move that could upset the short-term loan market.
The loans, called Balance Assist, will have a limit of $ 500 and will only be available to people who have had a checking account in the bank for at least a year. Deployment will begin in a handful of states to be announced by January 2021 before expanding to the rest of the country early next year.
The move makes Bank of America – with its tens of millions of customers – one of the largest financial institutions to have a small dollar consumer loan.
It’s a space historically dominated by payday lenders and other consumer credit outlets, who have earned a shabby reputation for their high fees. Regulators have urged banks to engage in small dollar lending for years, and in May issued guidelines encouraging banks to help consumers affected by the COVID-19 pandemic.
Yet prior to Bank of America’s announcement, among the major banks, only US Bank and KeyBank offered the type of small dollar loans that regulators were looking for despite customers indicating. they want the loans.
“Customers were telling us they can’t move from one paycheck to another. So that’s a bridge, ”Bank of America retail manager Steve Boland said in an interview. The bank wanted all of its customers to do all of their banking at the bank, he said, and not with more expensive alternatives.
Bank of America loans – which cost $ 5 regardless of size – will be repaid over 90 days in monthly installments. Customers are only allowed to withdraw one at a time and can prepay the loan without penalty.
The successful repayment of the loan will also be recorded on a person’s credit, which will potentially increase their credit rating.
The product has been applauded by some consumer advocates for its cost and usefulness, but questions remain as to how many bank customers will be able to use it.
“We need more institutions to provide low dollar credit,” Jennifer Tescher, CEO of the Financial Health Network, said in a statement. “It is encouraging that Bank of America has developed a safe, transparent and affordable alternative to overdrafts and payday loans, with real potential to improve financial health. ”
It’s good that a bank as big as Bank of America offers the loans, said Alex Horowitz, Senior Executive, Consumer Finance Project at Pew Charitable Trusts.
He is waiting to see to what extent loans will be available, especially if people with uneven credit will be able to access them.
“At a fundamental level, it’s a good thing for banks to offer small loans to their customers who are struggling to make ends meet and have long turned to payday lenders, securities lenders or pawn shops, ”Horowitz said in an interview.
This story was originally published 8 October 2020 8:00 a.m.