Payday Loans Can Help Borrowers Build Credit
Gaining credit has been regarded as a bit of a catch-22 – consumers need credit to get credit, and for members of the underbanked population this is nearly impossible. But a bank in Mississippi is working to change this with a program that offers small loans with low interest rates and provides classes to help members manage their finances.
BankPlus began their program CreditPlus four years ago with the intention of competing with payday lenders in Mississippi, which has the highest number of payday lenders per capita in the U.S. The $500 to $1,000 loans have an APR of 5 percent – significantly lower than any payday loan.
To apply for a loan, borrowers must take a three-hour financial literacy class, and if approved are required to set up a checking and savings account. Currently, BankPlus has made over 12,000 of these loans, adding up to $9.3 million, with a default of a little over 7 percent.
Only one other Mississippi bank has offered a similar program, and the payday lending business still remains very much intact. And even though the FDIC found in a study in 2008 that small loans often have the same default rates as other loans, few banks have offered a CreditPlus-type program.
The reasoning is understandable, as small loans are often just as time consuming but less profitable than larger loans, and lending to borrowers with little or no credit does not appeal to financial institutions. But BankPlus, which lost money for the first couple years of CreditPlus, is now making profits off of the program as well as helping unbanked or underbanked members out of debt.
Providing help in the form of a loan or a finance class can not only help underbanked populations achieve financial footing but can also give banks new customers. For banks looking to compete with payday lenders, loan application software can help financial institutions process applications efficiently, allowing small loans to be profitable and providing communities with financial stability.