Wells Fargo has launched a new kind 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 the 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 pay their amount back in four monthly installments, with no interest.
It’s already available in select markets, and launching in all states in the next four to six weeks, bank spokesman Josh Dunn told The Charlotte Observer Thursday. Flex loans are available only to Wells Fargo customers — the bank uses factors like account management practices, tenure and balances to determine eligibility, rather than using an independent credit bureau.
The loan is meant to be a quick and simple way for customers to directly access funds when they most need them, the bank said in a news release, without applications, hidden fees, late charges or interest.
The Flex Loan is similar to other small, short-term loans that U.S. Bank or Charlotte-based Bank of America offer, sometimes marketed as a cheaper alternative to overdraft fees.
Such loans also function as a good alternative to riskier methods of obtaining short-term cash, said Alex Horowitz, a lead consumer researcher at The Pew Charitable Trusts. He’s been tracking the ways these types of small loans can help lower-income bank customers avoid turning to more harmful options, like payday lenders charging triple-digit interest rates.
“Consumers have turned to (options like) payday lenders, because they haven’t been able to borrow small amounts from their bank,” Horowitz said. “But (these loans) are faster, they cost at least 15 times less, and they’re more affordable. So that’s a win for consumers.”
A payday loan alternative
Horowitz primarily looks at how small-dollar loans like Wells Fargo’s new product contrast with payday loans, which are short-term high-interest loans that many consumers take out in hopes of paying off with 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 distress, they don’t focus on price or affordability. They focus on speed, ease of access and certainty of approval,” he said.
Compared to those kinds of loans, Wells Fargo’s small-dollar offering costs about 15 times less, he added.
Payday lending is outlawed in North Carolina, and about half the states, but there still are a number of other risky, high-interest financing options out there, Horowitz said. Major banks’ small-dollar loans could help low-income customers avoid pawn shops or taking out other small loans with five times the interest rate.
“All states have pawn shops. All states have rent-to-own stores,” he said. “Some customers overdraft their checking account repeatedly as a way to borrow small amounts of money. These new loans are a more affordable option than that.”
Other banks offering small loans
Wells isn’t the only local bank to offer a small-dollar, 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 $5 flat fee, paid in three monthly installments.
Other banks with small-dollar loan programs include Ohio-based Huntington Bank and Minneapolis-based U.S. Bank, which has a handful of branches in Charlotte.
The loans are relatively low risk products for the banks, Horowitz said. “The bank is lending to known customers,” he said. “There’s a track record here. Even customers with low credit scores are successful in repaying when they can do so in affordable installments at fair prices.”
Plus, the loans’ tiny size means they’re still a small liability for banks – compared to something like a mortgage, Horowitz noted, which is nearly 100,000 times larger
He’s also confident that customers will make use of these types of loans: when Pew surveyed current payday loan borrowers, eight in 10 said they’d switch to using small loans at their bank.
Dialing back on overdraft fees
Bank of America and Wells Fargo also have marketed the loans as a more consumer-friendly alternative to overdraft fees.
Bank of America, Wells Fargo and other banks have started offering more options for lower-income customers after their practice of charging overdraft fees drew sharp criticism from lawmakers, especially during the pandemic.
Critics argued the fees were boosting banks’ profits at the expense of customers who could least afford it. In response, several banks ditched the fees, reduced them or offered options like overdraft-free checking accounts or small loans.
Horowitz hopes to see additional banks offer similar products. The more banks that offer short-term, small loans, the better chance their customers will have of avoiding the worst, he said.
“It can help them avoid other bad options: getting their utilities disconnected or having their car repossessed or being evicted,” Horowitz said. “If an affordable small loan from a bank can help someone avoid those harmful outcomes, that’s a win for consumers too.”