Despite claims to the contrary, data shows borrowers seeking small dollar loans (SDLs) are still unable to secure them from their banks or credit unions. Half of would-be borrowers for any loan type from 2022 to 2024 were denied at least once, and almost 30% of online SDL seekers in 2023 were customers of the six largest banks that provided SDLs.
Pew Charitable Trusts touts the SDL offering from traditional financial institutions as “a safer and more affordable option for customers who previously turned to high-cost payday loans or other alternative financial services, such as auto title loans and rent-to-own agreements.”
However, statistics from Pew’s own sources indicate customers using payday loans, cash advances, and online SDL providers are not finding what they seek at mainstream financial institutions.
The ongoing legislative battle against non-traditional lenders, which generally provide loans with steeper rates and penalties to borrowers with poor (or no) credit history, continues to hamper the ability of these borrowers to obtain funds they urgently need. Higher fees and shorter payment terms function as risk-mitigating features, akin to high insurance premiums for riskier customers, and without utilizing them, mainstream banks lower loss probability by raising loan criteria.
A look at small loan rules from large banks shows why, yet again, vulnerable would-be borrowers are shut out of the market. Online Lenders Alliance cites the following examples from Bank of America, the second-largest bank in the country:
Membership Mandates
To obtain an SDL at Bank of America, a prospective borrower with a credit score must have had a checking account there for at least a year, and those with no score must have had an account for 2.5 years. Additionally, only certain Bank of America checking accounts qualify. A holder of a restricted Bank of America Advantage SafeBalance account, which has high guardrails meant to mitigate risk, is not eligible.
Deposit And Balance Criteria
A client applying for an SDL is required to have a positive balance in all Bank of America checking accounts and to make regular monthly deposits, and cannot have any current Balance Assist loans (which are low-cost, short-term loans of $500 of less) or have had more than six Balance Assist loans in the past year.
Credit-Based Factors
These factors are not specified, but based on typical credit score calculations and notes on the Bank of America page, factors likely include positive credit history, quality, and length, as well as relatively little new credit, consistent payment history, and limited amounts still owed.
Together, these criteria narrow the pool from which Bank of America will accept SDL clients. The demographics of typical SDL seekers show why this is problematic:
Typical SDL Candidates
According to Pew’s Payday Lending in America, installment loan borrowers are disproportionately young, from 25-44 years old, often single parents, with annual salaries less than $40,000 (in 2012, roughly equal to $58,000 in 2026), and renters rather than homeowners.
At 25, many would-be borrowers are recent college graduates. They often have student loans, little money in any bank accounts, and short (or no) credit history. In sum, they may not qualify for SDLs at their banks.
Having children to feed and house, in rental residences where they can be evicted a year faster than a homeowner would face completed foreclosure procedures, these individuals benefit from the quick availability of online, payday, and other alternative loans.
Conclusion
Traditional loans and institutions do not meet the needs of non-traditional customers. History and economic reality prove, century after century, that allowing lenders and borrowers to mutually agree on loan terms is the way to maximize overall benefits. The “right” interest rates and payment schedules are the ones the free market creates, and they are often found outside the mainstream box.