We all have unexpected expenses. But for the many of us who are living paycheck to paycheck, those unexpected expenses are hard — if not impossible — to afford.
This week, U.S. Bancorp launched a new option to give its customers a way out of such a bind: Simple Loan, which lets the bank’s checking account customers borrow between $100 and $1,000.
The debut of a small-dollar credit option by a large bank could represent a big change in financial institutions getting back into a business they backed out of years ago. For consumers, it could mean another solution to their cash-flow plights.
What is Simple Loan?
Borrowers will repay the loan in three set payments: For borrowers who use autopay from a U.S. Bank checking account, the cost is $12 for every $100 borrowed. So, if you borrow $400, you will pay a total of $448 for the loan, or 70.65 percent APR. For customers who decide to manually pay back the loan, they will pay $15 for every $100.
That’s not cheap — even the bank’s website labels the product as a high-cost loan. Yet, Simple Loan is significantly cheaper than payday loans that are known for charging consumers triple-digit interest rates. The fees are also clear, and the funds hit quickly.
“There’s a lot to like about what they’ve done on a few fronts,” says John Thompson, chief program officer at the Center for Financial Services Innovation.
Solving a consumer need
In launching the installment loan, U.S. Bank is returning to a product that many other institutions have stayed away from.
While banks like Wells Fargo, Fifth Third Bank and even U.S. Bank used to offer payday loan alternatives, most financial services dropped them several years ago when strict guidelines made small-dollar credit hard to sell. In October 2017, The Office of the Comptroller of the Currency dumped its guidance on deposit advances, opening the door for banks to re-enter the market. But the reaction from banks? Mostly crickets.
Until this week.
U.S. Bank, which says it worked closely with regulators while developing the product, sees Simple Loan as solving a customer need.
“As a company, we are all focused on powering the potential of our customers. So, every day we work to be there in the moments that matter to them the most,” said Lynn Heitman, executive vice president, U.S. Bank consumer banking sales and support, in a press release. “Sometimes those moments are the unexpected ones when customers need short-term access to funds they don’t have on hand. We saw this as a need we could help with by providing customers with a trustworthy, transparent loan option.”
The bank has put numerous safeguards in place, including letting customers take out only one Simple Loan at a time. It also enforces a 30-day waiting period before a customer can apply for another one.
Is getting a Simple Loan a smart move?
If other banks follow U.S. Bank’s lead, more cash-strapped consumers could get another option in solving their needs.
“The majority of consumers are struggling,” says CFSI’s Thompson.
But Thompson urges consumers to keep in mind how loan repayments fit into the mix of their other obligations. “It’s just something you need to think through,” he says.
While Simple Loan is more affordable than payday loans, there are cheaper options for consumers with good credit, such as credit cards and personal loans. But for some people, it might be their best option when the alternatives are payday loans — products that are also regularly blasted for trapping people into cycles of debt.
Additionally, the need for such a loan highlights the greater need to build emergency savings, before the unexpected happens. Multiple Bankrate surveys show that lack of emergency savings is a major issue:
- Only 39 percent of Americans would pay for a $1,000 unexpected expense from savings.
- Just 29 percent of Americans have a fully funded emergency fund.
- Americans’ second most common financial regret is not saving enough for emergencies.
“We’d urge people to see their desire for a product like this as a reminder that emergency and rainy-day funds need to be tended to,” says Mark Hamrick, Bankrate senior economic analyst and Washington bureau chief.
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