Wells Fargo has launched a new type of loan that offers customers short-term cash for a flat fee — adding to a slowly growing list of cheaper, less risky financing options for cash-strapped customers.
The bank announced this New product, dubbed “flex loan,” on Wednesday. It’s a $250 or $500 digital-only loan that customers can apply for on their smartphone and comes with a flat fee of $12 or $20, respectively. Borrowers repay their amount in four monthly installments without interest.
It’s already available in select markets and will roll out in all states over the next four to six weeks, bank spokesman Josh Dunn told The Charlotte Observer on Thursday. Flex loans are only available to Wells Fargo customers – the bank uses factors such as account practices, term and balance to determine eligibility rather than using an independent credit bureau.
The loan aims to be a quick and easy way for customers to access funds directly when they need them most, the bank said in a press release, with no applications, hidden fees, late fees or interest.
The flex loan is similar to other small, short-term loans offered by the U.S. Bank or Charlotte-based Bank of America, which are sometimes marketed as a cheaper alternative to overdraft fees.
Such loans are also a good alternative to riskier methods of short-term cash raising, said Alex Horowitz, senior consumer researcher at The Pew Charitable Trusts. He’s tracked how these types of small loans can help lower-income bank customers avoid them Turn to more harmful optionslike payday lenders who charge triple digit interest rates.
“Consumers turned to (options like) payday lenders because they were unable to borrow small amounts from their bank,” Horowitz said. “But (these loans) are faster, cost at least 15 times less and are more affordable. So that’s a win for consumers.”
An alternative to payday loans
Horowitz is particularly looking at the contrast to small loans like Wells Fargo’s new product payday loanwhich are short-term, high-interest loans that many consumers take out in hopes of paying off on their next paycheck.
But those two-week loans often create more problems than they solve, Horowitz said. Sky-high interest rates — some as high as 400% — can leave borrowers drowning in debt for months.
“We know that when payday loan customers are in need, they don’t focus on price or affordability. They focus on speed, ease of access and certainty of approval,” he said.
Compared to these types of loans, Wells Fargo’s small-dollar offering costs about 15 times less, he added.
payday loan is banned in North Carolina, and about half of the states, but there are a number of other risky, high-yield financing options, Horowitz said. The big banks’ small loans could help low-income customers avoid pawnshops or other small loans with five times the interest rate.
“All states have pawn shops. All states have hire-purchase businesses,” he said. “Some customers repeatedly overdraw their checking account to borrow small amounts of money. These new loans are a cheaper option.”
Other banks offer small loans
Wells isn’t the only local bank offering a small, low-cost loan.
In 2020 Bank of America launched a similar product Called “Balance Assist”. It allows customers to borrow up to $500 for a flat fee of $5 paid in three monthly installments.
Other banks with microcredit programs include Ohio-based Huntington Bank and Minneapolis-based US Bank, which has a handful of branches in Charlotte.
The loans are relatively low-risk products for banks, Horowitz said. “The bank makes loans to well-known customers,” he said. “There is a track record here. Even customers with a poor credit rating can successfully repay if they can do so in affordable installments at fair prices.”
Also, the tiny size of the loans means they’re still a small liability for banks — compared to a mortgage that’s nearly 100,000 times larger, Horowitz noted
He’s also confident that customers will take advantage of these types of loans: When Pew surveyed current payday loan borrowers, eight out of 10 said they would switch to small loans at their bank.
Recall Overdraft Fees
Bank of America and Wells Fargo have also marketed the loans as a more consumer-friendly alternative to overdraft fees.
Bank of America, Wells Fargo and other banks have begun offering more options for lower-income customers after their practice of charging overdraft fees proliferated criticism from the legislatureespecially during the pandemic.
Critics argued the fees boosted banks’ profits at the expense of customers who could least afford them. In response, several banks dropped the fees, reduced them or offered options such as overdraft-free checking accounts or small loans.
Horowitz hopes other banks will offer similar products. The more banks offering short-term small loans, the better chance their customers have of avoiding the worst, he said.
“It can help them avoid other bad options: cutting off their utility lines or forfeiting their car or eviction,” Horowitz said. “If an affordable small loan from a bank can help someone avoid these harmful consequences, that’s a win for consumers, too.”