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Key learning points
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Small dollar loans are personal loans offered by select financial institutions for amounts up to $2,500, which are repaid in equal periodic payments.
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Only institutions that meet federal and state lending guidelines for the program can receive the small dollar loan from the federal government.
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Approval for a small dollar loan is based on banking activity and not credit, but eligibility will vary by institution.
Small dollar loans are a highly regulated, low-cost, short-term personal loan with non-traditional underwriting methods. Offered by multiple institutions, including select national banks, small dollar loans help borrowers with less-than-stellar credit grow their credit and get the money they need.
What is a small dollar loan?
Small dollar loans are low-cost, short-term loans aimed at borrowers with little to no credit history. These loans are offered by national banks, community banks and credit unions and have a maximum amount of $2,500. They are regulated at the federal and state levels to ensure costs remain low.
Designed as an affordable alternative to payday loans, small dollar loans can be used for a wide range of expenses and are repaid in regular installments. However, what sets them apart from other forms of lending are the acceptance criteria. Rather than focusing solely on creditworthiness, small dollar loan approval is based on routine banking activities, although the details may vary from bank to bank.
Examples of small dollar loans
Because small dollar loans are offered by a wide range of institutions, the details of each loan will vary. However, they must still fall within federal guidelines and not exceed $2,500. To show what a small dollar loan might look like, we’ll outline three examples: the Bank of America Balance Assist Loan, the Wells Fargo Flex Loan, and the U.S. Bank Simple Loan.
| Loan details | Wells Fargo | bank of America | American bank |
|---|---|---|---|
| Maximum loan amount | $500 | $500 | $1,000 |
| Refund period | 4 monthly installments | 3 monthly installments over 90 days | 3 monthly installments |
| Interest rates | No | No | No |
| Cost | A flat fee of $12 or $20 | A flat fee of $5 | $6 fee for every $100 borrowed |
| Monthly payments* | $130 | $168.30 | $353.30 |
*If the maximum loan amount including costs is borrowed
How do small dollar loans work?
To ensure non-predatory lending behavior, small dollar loans are regulated at the federal and state levels as part of the Small Dollar Loan Program (SDL).. As part of the program, financial institutions can apply for a small-dollar loan from the federal government. Part of the agreement ensures that loans made with the funds meet specific requirements set forth in state and federal guidelines.
Interest rates and fees may vary by state, but APRs cannot exceed the legal limit 36 percent. While you may get a higher rate with a small loan than a traditional personal loan, the rates are much lower than what you could get with a personal loan.
Some states charge a flat fee for the entire loan, while others charge a simple fee or a flat percentage. The fee structure can also vary depending on the institution providing the loan.
Small dollar loans must meet a set of specific requirements introduced by the SDL program. If you are considering a small loan that does not meet the following requirements, it is not an official SDL program loan and is not federally protected.
- Maximum loan amount of $2,500 or less.
- Will be repaid in installments.
- No fines for prepayment.
- You can report to one of the three credit bureaus.
- Meet all other affordability requirements set by the financial institution.
State Rules for Small Dollar Loans
Several states have done so laws implemented which aim to reduce the cost of small loans and provide more time for repayment. This is to prevent consumers from becoming trapped in predatory debt cycles. Institutions offering small dollar loans under the SDL program must meet all stated regulations to qualify for the program and receive grants.
Your loan and its total cost may vary because states have different fee limits and structures for small-dollar loans. Some states have fee limits, such as not charging more than $15 per $100 or having a maximum fee of $45, while other states have fee structures based on the total amount borrowed. Your state’s banking and regulatory department should have information about the availability and specific cost structure of its small dollar loans.
Where you can get a small dollar loan
Small dollar loans are not as popular as traditional personal loans and are not offered at every financial institution. But through years of development, they are now there more accessible than ever.
Select national banks
Just now five years agothen you wouldn’t have been able to walk into a national bank and apply for a small loan. Now six of the eight largest national banks offer these loans to their customers. As of late 2023, this will include Bank of America, Huntington Bank, Regions Bank, Truist, US Bank and Wells Fargo.
If possible, apply for a small loan from the bank with which you have already opened an account. You’ll need to open an account to get approved, so the process will be much faster if you choose your regular bank.
If your bank does not offer the loans, you will probably have to wait some time after opening a new account before you have sufficient transaction behavior. Before signing up, ask a representative how long your account must be active and what the specific banking requirements are for approval.
Community banks and credit unions
If you are already a customer of a community bank or local credit union, check to see if they offer small loans. Just like at a national bank, non-customers of a community bank must also open an account to sign up.
If you’re thinking about going with a credit union, keep in mind that in addition to opening an account, you’ll also need to become a member to sign up. Most credit unions base their membership on location or profession, but others are a little more specific. For example, membership may only be extended to state employees and their families.
Since the membership process may also require the sign-up process, consider borrowing from a bank if you need the money sooner rather than later.
In short
Small dollar loans are are becoming increasingly popular, offering financing to those who need it most. These low-cost loans allow borrowers with little to no credit to borrow and repay amounts of $2,500 or less. Although small dollar loans may have higher costs than a traditional personal loan, you can rest assured that you are not borrowing a predatory loan with sky-high rates.
Frequently asked questions about small dollar loans
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Small dollar loans typically range from $50 to $2,500. The maximum loan amount varies depending on the institution you borrow from, but cannot exceed the federal limit of $2,500.
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Costs for small dollar loans vary by state. Some states charge a flat fee for the entire loan, while others charge a simple fee based on the loan amount and others still charge a flat percentage.
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Small dollar loans are paid back over several months, rather than during the next billing cycle. They also have transparent fees with fixed rates and more favorable terms compared to payday loans.
For example, payday loans can have interest rates as high (or higher) than 650 percent APR, which can create a high-interest debt cycle. However, small dollar loans have set a 36 percent APR cap and additional rules have been put in place to protect borrowers.
