Payday Advances

Giving small payday loans is a very lucrative business. In fact, it is recorded to hit $50 billion annually and this is mainly because of its ease of application and high approval of this type of loan. According to the Financial Service Centers of America, the revenue online lenders generate from small loans is the main reason why banks consider on adopting them too.

Small loans are short-term financial help designed to assist those in need of extra cash in between paydays. Firms against small loans have created campaigns leading to these services getting less-than-stellar populations. But the fact that banks wants a piece of the pie only means that small loans are good business that bring tremendous benefits to consumers.

The Federal Deposit Insurance Corp. or the FDIC is the primary agency pushing for the adaptation of small loan rule to banks. The main goal is to hopefully reduce the cost of small loans in order to encourage more borrowers. The pilot tests will be conducted in areas near military bases or in low- to middle-income neighborhoods.

Conditions have already been set for the pilot tests. For instance, the amount for small loans would be larger than $500 and the terms will be longer. There will be no repayment penalties as well as low or no origination fees.

However, the project fails to cover two basic facts that contribute to the popularity of small loans today.

First, the pilot tests indicate that a credit check will still be run. Banks and other traditional institutions anchor their decision for the approval and denial of loans on the results of the credit check that they run. But third party lending firms require no credit check for loan approval. Hence, web-based lenders are getting the attention of those with bad credit or with no credit history at all.

Unless banks change their ruling regarding credit history, their experiments on small loans will not succeed in terms of the potential customers reached.

Second, conditions set for the pilot tests do not say anything about cutting the loan processing time. It appears that the same requirements will most probably be required. On the other hand, the best online lender will only ask for a few basic documents to process a small loan application. And these would include a proof of active employment, a copy of an active bank account, a proof of US citizenship and age and a duly filled out electronic form.

Unless the conditions set for the pilot tests adapt these two basic facts about small loans, banks will fail to catch the attention of the majority of the market.