With many American consumers lacking access to affordable, high-quality credit, the Center for Financial Services Innovation has released a new report outlining eight strategies to help financial service providers design small-dollar loans that offer value to consumers and providers. Many small-dollar loans available have high interest rates and can lead borrowers into a cycle of repeat usage and increasing debt, but CFSI says the opportunity for providing affordable short-term loans is significant. Borrowers paid fees and interest totaling approximately $44 billion on small-dollar loans and $4.2 billion on installment loans in 2014, the report found. Some of the strategies CFSI recommends include: designing business models based on successful customer repayment, not on high probabilities of default; prioritizing long-term relationships over short-term profits; and underwriting to balance inclusivity with risk.
The strategies in the report, written by Thea Garon, manager, and Beth Brockland, director, at CFSI, are based on insights generated from data collected by the Test & Learn Working Group, which consists of diverse lenders assembled to create an understanding of how small-dollar loans can align provider profitability with borrower success.