CHICAGO (2/28/14)--Access to high-quality, small-dollar credit can help individuals build wealth and weather financial turbulence. The Center for Financial Services Innovation (CFSI) released a Compass Principles guide to help identify what such a program would look like.
In 2012, consumers spent an estimated $41.2 billion on small-dollar credit products such as payday loans, deposit advances, tax refund anticipation checks, auto title loans, and secured and subprime credit cards.
Broadly speaking, small-dollar credit refers to consumer loans of less than $5,000 with terms ranging from two week to three years, CFSI said. It defines an affordable small-dollar loan as one where the borrower can successfully repay the loan without re-borrowing and still meet the basic needs of food, shelter and medical care. Loan amount, repayment period, interest rates and fees all factor into the affordability of the loan.
Unfortunately, many small-dollar credit products serve not to get the borrower through a tough time, but instead enmesh them in a cycle of deepening debt and repeat borrowing.
The guide defines high-quality, small-dollar loans as ones that:
- Are made with high confidence in the borrower's ability to pay;
- Are structured to support repayment;
- Are priced to align profitability for the provider with success for the borrower;
- Create opportunities for upward mobility and improved financial health
- Have transparent marketing, communications and disclosures;
- Are accessible and convenient; and
- Provide support and rights for borrowers.
All need to reflect the Compass Principles of embracing inclusion, building trust, promoting success and creating opportunity, CFSI said.
Credit is not the answer for every consumer, the guide noted. "For some people, however, access to credit might only worsen their financial situation" because they have little income or unmanageable debt. They are at risk of becoming repeat borrowers, falling deeper into the cycle. Non-credit solutions--job training, budgeting help or savings tools--may be more appropriate.
Advisers to the project included Consumer Federation of America; Kinecta FCU, Manhattan Beach, Calif.; the National Federation of Community Development Credit Unions; and Self-Help FCU, Durham, N.C.