Recently, David Reiling, Sunrise Banks CEO, was published by Ford Foundation and wrote about a revolution in small dollar lending. Below is an excerpt of the blog. You may read the blog in its entirety here.
As the CEO of a community development financial institution (CFDI) that serves low-income and working class households, I’m often asked: Why do consumers go to high-interest payday lenders to get small-dollar loans— and in the process rack up hundreds or thousands of dollars in debt—rather than to banks or credit unions?
The answer is that most banks and credit unions simply don’t offer small dollar loans. For most of them, it doesn’t make good business sense given the considerable staff time, systems, and oversight needed to issue and document an in-person loan for such a small amount.
Say, for example, that a bank is willing to lend a customer $200 for six months, with an annual percentage rate of 21 percent. That 21 percent results in just $13 in interest earned for the bank. But the cost associated with making the $200 loan is well above that $13—even before taking into consideration the inherent risks of making the loan. From the consumer’s perspective, a payday loan is preferable: It’s much more convenient, easily accessible, and faster to obtain—even if the interest rate and cost of repaying the loan are much more expensive.
Read the full posting as a part of the Ford Foundation’s Equal Change Blog here.