What Is a Small-Dollar Loan?

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Definition

A small-dollar loan is a short-term, low-cost personal loan provided by a reputable financial institution. The loan is typically made for less than $2,500 and is repaid in regular, equal installments over a few months.

Key Takeaways

  • Small-dollar loans are short-term, low-cost loans from reputable financial institutions such as banks and credit unions.
  • Small-dollar loans are repaid in equal payments over several months instead of by the next paycheck like with payday loans.
  • Typically, you don’t need collateral such as a car title or house to apply for a small dollar loan.
  • Approval for a small-dollar loan may depend on your bank account and credit history.

How Does a Small-Dollar Loan Work?

A small-dollar loan works similarly to a personal loan. You apply for a lump sum of money, which you then repay in regular installments with interest. This loan can helps you meet immediate financial needs while avoiding predatory lending such as payday loans, vehicle title loans, and pawnshops.

Instead, small-dollar loans help consumers quickly access cash from reputable financial institutions such as banks and credit unions.

Note

The small-dollar loan program (SDLP) is part of the Consumer Protection Act. It allows financial institutions to offer consumers affordable alternatives to high-cost, small-dollar loans such as payday loans.

Customers can borrow up to $2,500 depending on the financial institution, and the money is typically borrowed in increments of $100. Small-dollar loan fees have fixed rates with no hidden costs. The rates can be as little as a flat fee of $5 for the entire loan, a simple pricing fee such as $12 for every $100 you borrow, or a fixed percentage rate.

While some small-dollar loans can have interest rates as much as 36%, this is still significantly lower than payday loans, which can charge nearly 400% APR.

To receive a small-dollar loan, you must pass a credit check. If approved, you will receive your cash in one lump sum. Typically, you can only apply for one small-dollar loan at a time. Once that is repaid, you may face a 30-day waiting period before you can apply again.

Rates and repayment periods vary by loan and financial institution. For example, some banks may offer small-dollar loans that are short term with repayment terms that consist of making three equal monthly payments over 90 days. Other small-dollar loans may have repayments of up to 24 months.

FDIC Small-Dollar Loan Elements Guidelines
Amount borrowed $2,500 or less
Repayment terms 90 days or less
Annual Percentage Rate (APR) Maximum up to 36%
Fees None up to a maximum of 36%

A small-dollar loan is unsecured, meaning that it does not require collateral such as a car title or jewelry. However, if you cannot repay the loan, your credit score will be negatively affected.

Example of a Small-Dollar Loan

Let’s say you need $500 to repair your refrigerator that suddenly stopped working. But you do not have the cash available on hand. So you apply for a small-dollar loan at your local credit union.

The credit union charges $12 for every $100 you borrow, for a total of $60. But unlike a payday loan, you won’t pay $60 every two weeks. Instead, you will repay a total of $560 over 90 days. That’s about a $186 payment per month for three months.

Types of Small-Dollar Loans

Installment Loan

Installment loans are small-dollar loans with a fixed interest rate that you pay off in a series of equal monthly payments over several months.

Single-Payment Loan

This is a short-term, small-dollar loan that is paid back in a single payment and has a one-time fee that is typically less costly than missing payments, bouncing checks, or neglecting bills.

Deposit Advance Loan

With this type of small-dollar loan, your bank or financial institution gives you a loan, typically about $500, in advance. The bank then deducts the money and a service fee from your next direct deposit.

How To Get a Small-Dollar Loan

To be eligible for a small-dollar loan, you typically must have a credit check and meet other requirements, including that you:

  • Are age 18 or older
  • Have an active checking account open for a minimum period of time, such as six months or one year
  • Have a positive account balance and make regular monthly deposits
  • Do not currently have an open small-dollar loan
  • Have valid identification and proof of income

Applying for a small-dollar loan is often quick, easy, and convenient. Many financial institutions allow you to apply online. To begin your application:

  • Access the application online or through the bank’s mobile app
  • Apply for the amount you want to borrow
  • Submit the application

If your application is approved, you will have access to cash within minutes.

Note

As part of the small-dollar loan program, financial institutions must report your payment history to at least one of the three major credit bureaus. As a result, how you repay your small-dollar loan, including whether you make late payments or fail to repay, will have an impact on your credit score.

Pros and Cons of Small-Dollar Loans

Pros
  • Longer payment times than payday loans

  • Rates are fixed with no hidden fees

  • Quick and easy application

  • Typically, no collateral is needed

Cons
  • You must have an open checking account

  • Approval requires a credit check

  • Can damage your credit score

Pros Explained

  • Longer payment times than payday loans: Small-dollar loans are short-term loans that are paid back over several months instead of by your next payday.
  • Rates are fixed with no hidden fees: The fee is often a fixed rate and lower cost than payday loans.
  • Quick and easy application: Many financial institutions provide a convenient mobile or online application process.
  • Typically, no collateral is needed: Most small-dollar loans are unsecured and do not require collateral to borrow money.

Cons Explained

  • You must have an open checking account: Many banks require that your checking account be at least 6 to 12 months old and show a history of recurring monthly deposits.
  • Approval requires a credit check: Unlike payday loans, approval amounts and interest rates may depend on your credit history. Approval does not depend on the amount of your paycheck alone.
  • Can damage your credit score: Your payment history must be reported to at least one major credit bureau. Any non-payment or late payments will likely negatively impact your credit score.

Frequently Asked Questions (FAQs)

Where can I borrow small amounts of money?

The small-dollar loan program (SDLP) allows certified financial institutions to offer small-dollar loans as a responsible alternative to high-cost predatory lenders. So if you need to borrow a short-term, small-dollar loan with good repayment terms, you can typically find them at banks, credit unions, and savings associations.

Can I get a small-dollar loan with no credit?

You can get a small-dollar loan with no credit, depending on your financial situation. Some banks may take into account factors such as your deposit history and the length of time you have been a customer.

What's the smallest amount I can get a loan for?

Small-dollar loans are typically borrowed in increments of $100, and the smallest amount you can receive is usually $100.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. National Archives. “Federal Register:Small Dollar Loan Program.”

  2. U.S. Bank. “U.S. Bank Launches Simple Loan To Meet Customers’ Short-Term Cash Needs.”

  3. Bank of America. “Bank of America Introduces Balance Assist, a Revolutionary New Short-Term, Low-Cost Loan.”

  4. Consumer Financial Protection Bureau. “What Are the Costs and Fees for a Payday Loan?

  5. Department of Commerce and Consumer Affairs. “Financial Institutions: 2022 Licenses for Small Dollar Loans/Installment Loans Rev 12.29.21.”

  6. FDIC. “A Template for Success: The FDIC's Small-Dollar Loan Pilot Program.”

  7. Consumer Financial Protection Bureau. “My Bank Offers a Direct Deposit Advance or Checking Account Advance. What Is This?

  8. U.S. Bank. “Simple Loan: Calculate Payments.”

  9. Bank of America. “Balance Assist Can Help With Unexpected Expenses.”

  10. Office of the Comptroller of the Currency. “Interagency Lending Principles for Offering Responsible Small-Dollar Loans.”

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