The Federal Deposit Insurance Corporation (FDIC) has introduced a program in which banks can actually offer loans that are small enough so that they are attractive to buyers, just like the payday loans. But the competition is stiff, and this program is not doing well apparently.

The FDIC came to know that there were only 31% of the banks that actually participated, and during the 4 years of the implementation, there were only 5.5 million bucks that were generated by 8300 dollars loans by the banks themselves. On contrast, the payday loans are much bigger, going over 150 million loans that sum up to billions of dollars.

The FDIC did an interesting survey and study, and found out the real reason why the lowered rates from the banks were not working out. The simple fact was that the customer was still paying the same to the bank as before, due to the fact that the bank payment terms were significantly longer than those of the payday loan lenders. Even if the participating banks made two or three times the loans as the payday lenders, the business was not that great as compared to the payday money lenders due to the above reason. On an average the small dollar loan at a bank is $675 and the average rate of interest is about 15%. Loan terms from banks are about 10 to 12 months.

The payday money lenders on the other hand, and depending upon the state that you are in, will have a capped amount on the money being lent and the amount is usually in the range of $200-1000 in most cases. On a yearly average, the interest rates for the money lenders is as much as 500%, but because of the fact that the loan terms last only for few weeks, the user is still on the profit side because he does not pay the same interest as he would in the case of a bank. There can only be a problem if the borrower makes a choice to get a rollover, meaning that he chooses to extend the loan, in which case he will have to pay more.

Good deals on small dollar loans, is not what the traditional banks are gunning after. But they do look for prospects of building a good relationship with customers with the same. Through this program, the banks see greater and better opportunities of getting more and more customers to sign up.
Perhaps the greatest asset for payday loan lenders is the fact that customers have a lot of convenience. The process is actually a very simple affair of just filling an online form, filling in all the details, giving out the statements for the bank, the salary details and the like, and it’s even possible that the loan gets sanctioned on the very day. This sort of convenience is the winning formula behind the success of the payday loan lenders, and is one of the major reasons why the banking sector is not able to keep up. So we can say that the key factor here is convenience.

In a general scenario, the money lender will work out a schedule for payment based on the schedule of the borrower, and once that has been done, he expects that the borrower to return the money on the next paycheck. In cases of failure, the loan amount can be increased and this means that the borrower gets more time to repay the debt. The biggest plus point is that there is no check record because checks do not form part of the business, and that’s what makes this exercise much better than the traditional method of applying for loans at a bank.