What are small dollar loans?
Short term loans typically have three features: (i) they are for a small dollar amount; (ii) borrowers must repay relatively quickly; and (iii) they are typically used for unexpected expenses such as auto repair, utility bills, or medical bills.
How long do borrowers have to pay back a short term loan?
The term can be as short as until the next paycheck or several months depending on the type of credit offered. Sometimes, this period of time can be extended in what is known as a "rollover,” "renewal” or "extension.” In any case, the purpose is to give the borrower the chance to repay the loan at a later time, if needed, as agreed upon by the small dollar lender. If a rollover, renewal or extension situation arises the short term lender will impose a fee for the extension of time.
It is in the consumer’s best interest to pay off a short term loan as soon as possible to avoid incurring additional fees.
How much can a consumer borrow?
Loan amounts vary from lender to lender, but typically range from $100 to $2,000. Many lenders will make the larger dollar values available only to returning borrowers who have demonstrated an ability to repay.
How much does a short term loan cost?
Fees for short term loans can be as low as $10 per $100 borrowed up to $50 per $100. Consumers should shop for the lowest fee product for which they qualify.
Is there an application fee?
Typically, no. Short-term lenders generally impose only one fee to obtain a loan. Most short term lenders do not charge application fees, origination fees or any other hidden fees or charges.
Why is the APR so high?
The APR on a loan informs the borrower of the cost of the loan over the term of the loan. So, the longer the term of the loan, the smaller the APR. For example, a $100 loan with a $10 fee and a 7-day term has an APR of 521.43%. The same loan with a term of 14 days has an APR of 260.71%. The same loan with a term of 21 days has an APR of 173.81%. In addition to the APR of a small dollar loan, we recommend that consumers also evaluate the total cost of credit in terms of fees and interest paid.
What does an applicant need to qualify for a short term loan?
Qualifications vary from lender to lender. Most lenders require that borrowers have a job or other steady source of verifiable income, be at least 18 years of age and have a bank account with direct deposit. Other conditions may apply.
How long does approval take?
Most lenders will approve an applicant shortly after he or she applies for a loan, provided the lender can confirm the information submitted on the loan application.
Do small dollar lenders run credit checks?
Most lenders will run a credit check before offering credit; however, they typically utilize a specialized credit reporting agency that serves the short term lending industry instead of one of the big three credit bureaus (i.e., Experian, Equifax or TransUnion).
What if an applicant has no or bad credit?
Lender underwriting requirements vary. Nevertheless, short term loans are generally available for applicants who meet lenders’ minimum eligibility criteria regardless of bad or no credit history.
After approval, how long does it take to get a loan?
If you obtain a loan through an on-line lender, money is usually credited to a borrower’s account via the ACH system on the next available business day.
Is an applicant’s personal information kept confidential?
Yes! Online short-term lenders are highly sensitive to the privacy and security of their customer’s information. As such, online lenders comply with the privacy protections provided for under the Gramm-Leach-Bliley Act and share information only as permitted by that law. Additionally, online lenders utilize encrypted SSL (Secure Sockets Layer) servers to ensure that any electronically transmitted data remains secure. All online lenders, and third parties with whom they communicate, disclose their privacy policies to consumers.
Can a borrower prepay a loan before the scheduled due date?
Yes. As a general rule, short-term lenders will permit borrowers to prepay their loans without incurring a prepayment fee.
Can a borrower rescind a short term loan?
Generally, yes. Most short-term lenders will permit you to rescind your loan without cost if you notify them of your decision to rescind the loan within a brief timeframe (typically 24-72 hours) after obtaining the loan as set forth in the loan documents.
Can an active duty service member get a short term loan?
Federal law prohibits lenders from making most types of, short-term loans to active duty military and their dependents.
Does an applicant need to provide collateral to receive a loan?
No, small dollar loans are not secured by property or other collateral.
How often should consumers use short term loans?
These loans are a short-term answer to an immediate cash need. They are not intended for repeated use and reliance on short-term loans can create serious financial difficulties. If consumers need help with credit, budgeting or debt management, they should contact the National Foundation for Credit Counseling at 1-800-388-2227.
Additionally, most short term loans contain the following notice in bold text in the loan agreement:
NOTICE: A SHORT-TERM LOAN SHOULD BE USED FOR SHORT-TERM FINANCIAL NEEDS ONLY, NOT AS A LONG-TERM FINANCIAL SOLUTION. CUSTOMERS WITH CREDIT DIFFICULTIES SHOULD SEEK CREDIT COUNSELING OR MEET WITH A NONPROFIT FINANCIAL COUNSELING SERVICE IN THEIR COMMUNITY.
What is a lead generator?
A lead generator is a liaison between loan applicants and online lenders. A lead generator receives the loan application information submitted via a website and then provides that information to lenders that may be able to make a loan to the applicant. The lead generator does not originate or fund loans, perform credit checks or otherwise make a lending decision.
What happens if a borrower pays late?
Some lenders will impose a fee for late payments. If they do, the lender will disclose the amount of the fee and any grace period in the loan agreement and in the loan disclosures as required under the Truth in Lending Act.
What happens if a borrower doesn’t pay?
Short-term lenders may engage a collection agency to attempt to collect on defaulted debt. However, they will not garnish your wages or attempt to prosecute you for non-payment.
Can a borrower be required to repay the loan electronically?
Yes and no. A short-term lender can require you to repay a single installment payment electronically via a preauthorized debit to your account. However, if you agree to repay your loan in installments, then the lender is prohibited by federal law from requiring you to repay the amount via a pre-authorized recurring debit. In an installment loan situation, the lender must permit you to repay via a method other than electronic repayment, such as by check or money order. The lender may, however, charge you less for the loan if you agree to repay electronically (i.e., the lender may charge $5 per $100 to repay the loan rather than $10 per $100 if you agree to a recurring debit to repay the loan).
Are short term lenders regulated?
Yes. The CFPB is the federal regulator for all short-term lenders, and has the authority to enforce all applicable federal consumer protection laws, including the Equal Credit Opportunity Act, the Truth in Lending Act and the Electronic Funds Transfer Act. Depending on their ownership structure, small dollar lenders may also hold state licenses, which subject them to regulation by state banking departments.
How can an applicant identify a reputable short term lender?
Like most other financial services companies, short-term lenders are members of trade associations and other professional organizations that offer training and compliance assistance. Reputable lenders will display certification or other association emblems that indicate their dedication to compliance and adherence to industry best practices.
Examples of industry best practices are available at: http://www.onlinelendersalliance.org/?page=BestPractices