Small-dollar loans are a winning proposition for banks and borrowers

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When finances are tight and you are struggling to meet routine bills or an unexpected expense surprises you, where do you turn? For millions of Americans, the answer has traditionally included credit cards, payday loans, overdraft or newer options like digital early wage access services. However, a better solution is out there and becoming more common: bank-offered small-dollar loans.

These accessible, affordable and well-designed short-term loans are proving superior to other options, and everyone from banks to their customers and communities stand to benefit if they are more readily available.

Bank-offered small-dollar loans address short-term liquidity gaps with a more consumer-friendly approach. Typical offerings are under $1,000 with digital applications, same-day funding, repayment in manageable monthly installments and costs far lower than other options available to struggling consumers.

The advantages are clear and multifaceted. Rather than relying on credit scores, many banks now use cash flow underwriting. This approach opens credit access to many who would otherwise be declined, providing what several borrowers have described as their first credit-related "Yes" from a traditional financial institution. As an example, someone who would pay at least a few hundred dollars in fees to borrow $500 for 3 months from a payday lender is now paying $30 to $50, or even less, to borrow that from their bank. With that type of pricing and payback structured with monthly installments rather than lump-sum repayment, these loans are significantly more manageable to repay than alternatives. By keeping both loan amounts and monthly payments modest, banks also help ensure borrowers don't take on more debt than necessary while addressing their short-term needs effectively. The convenience factor cannot be overlooked either. Consumers of short-term credit value speed, and bank-offered small-dollar loans, with mobile-first applications, prioritize quick approvals and funding.

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For consumers, these loans provide a trusted lifeline when funds are tight, and especially during financial emergencies. The structure encourages manageable repayment to prevent repeat borrowing, and the relationship with an established financial institution offers peace of mind. For banks, technological advances have made these loans cost-effective to offer at scale. Bank of America, for example, issued over 1 million such loans in less than three years after launching their product. Just as important, small-dollar loans build customer loyalty and create opportunities for deeper banking relationships.

Research by my organization reveals that borrowers express deep appreciation for the trust implied by these loan approvals. Some borrowers, accustomed to seeking credit from nonbank institutions, often see greater value in maintaining their deposit accounts and are more receptive to other bank services after using small-dollar bank loans.

Small-dollar loans represent one of the few products regulators actively encourage financial institutions to offer, creating additional impetus for banks to innovate while serving community needs. While most of the largest banks have embraced small-dollar lending, many still remain on the sidelines. Financial institutions should recognize both the business opportunity and the chance to better meet consumer needs by developing and actively promoting these products. Greater awareness and availability of these loans can help more people avoid predatory lending while building healthier financial futures.

Bank-offered small-dollar loans represent that rare product that benefits everyone involved: Consumers gain access to fair, transparent credit; banks develop stronger customer relationships; and communities become less vulnerable to more predatory lenders. As the financial services industry continues evolving, small-dollar loans stand as a model for how traditional banks can innovate to meet customer needs while maintaining responsible lending standards.