New laws, lenders boost access to affordable microcredit | personal financing

Annie Millerbrand

Inflation has fallen particularly hard on people already They struggle to put gas in their cupboards and groceries in their refrigerator. For many, a payday loan may seem like the only way to get the necessary cash.

However, in recent years, as more countries impose restrictions on short-term and risky loans, new lenders have emerged that offer low-cost small loans, making it easier than before to find an affordable loan that won’t drag you into unmanageable debt.

In some states, new laws mean better loans

There is currently no federal law for maximum interest rates for small dollar loans. rather, States decide whether to cap rates for payday loans. As a result, the cost of borrowing a few hundred dollars often depends on where you live.

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In recent years, four states – Colorado, Hawaii, Ohio and Virginia – have passed laws that effectively lower the cost of microloans and give borrowers longer repayment terms. A study by The Pew Charitable Trusts in April found that even with reforms, payday lenders continued to operate, but with safer loans.

Although some new lenders started doing business in these states as soon as the laws went into effect, the main effect was that current payday lenders standardized their storefronts and made their loans more affordable, says Alex Horowitz, Pew’s chief research officer.

National banks and local credit unions get involved

A bank or credit union may not have been your goal for a small loan in the past, but it may be today.

Seven large banks have begun offering or announcing plans to offer small dollar borrowing options at low annual percentage rates in the past few years, Horowitz says, including Bank of America, Wells Fargo and Truist. These loans are available to existing bank customers across the country, regardless of government interest rate limits.

Banks primarily rely on customers’ banking history rather than their credit scores to determine if they qualify for a small loan. Loans β€” starting at $100 β€” are typically repaid in monthly installments of no more than 36%, which is the maximum rate an affordable loan can get, according to consumer advocates.

β€œThe fact that banks are starting to make small loans could upend the entire payday loan market,” Horowitz says.

Local credit unions have membership requirements and maintain lower profiles than payday lenders, so people who need quick cash often overlook them, says Paul Dion, director of research at Filene, a think tank focused on helping credit unions serve their communities.

But if you can go to your local credit union, there’s a good chance you’ll qualify for membership, he says.

That’s because credit unions often serve people who live or work in their communities. These organizations have been striving for financial inclusion by adapting their products, such as loans, to better suit the needs of their clients, says Dion.

“Credit unions get better at actually having the best product and not saying no, and actually figuring out what’s the best solution for that person stepping in,” he says.

Other Borrowing Options

Even in states where laws aim to ban payday lending altogether, people can find it Alternatives to risky borrowingsays Sharla Rios, microcredit and debt researcher at the Center for Responsible Lending.

You might be able to set up a payment plan with your utility company or borrow from a friend or family member, she says. Here are some borrowing options to consider before getting a payday loan.

Advance paychecks. Some companies, including Walmart and Amazon, allow their employees to access a portion of their paycheck early as a workplace benefit. This can be an interest-free way to borrow money if your employer offers it, but since the repayment comes from your next paycheck, it’s best to use it in moderation.

Cash Advance Applications. Apps like Earnin and Dave allow you to borrow a small amount of money, usually $25 to $200, before paying. They sometimes charge a fee for instant access to your funds or ask for voluntary tips. They also take reimbursement from your next paycheck.

“Buy now, pay later.” To cover necessary expenses, the “Buy Now, Pay Later” loan allows you to purchase an item with only partial payment. You will pay the balance in equal installments, usually within the next six weeks. This type of financing can be interest-free if you pay the full balance on time.

Low interest installment loans. Depending on your credit score and your income, you may qualify for an installment loan at an annual rate of less than 36%. These loans range from $1,000 to $100,000 and are repaid over longer periods, usually two to seven years. Online lenders who give bad credit loans more often Pre-qualify you for a loan Using an easy credit debit, which allows you to compare loans without affecting your credit score.