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Bank of America to offer payday-style loans that cost just $5. Here's how they work.

Bank of America to offer payday-style loans that cost just $5. Here's how they work.

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Bank of America will begin to offer small, short-term loans to cash-strapped customers, a move that could upend the market for short-term loans.

The loans, called Balance Assist, will have a $500 limit, and will only be available to people who have had a checking account at the bank for at least a year. The roll-out will start in a handful of to-be-announced states by January 2021 before expanding to the rest of the country early next year, the Charlotte-based bank announced Thursday.

The move makes Bank of America — with its tens of millions of customers — one of the biggest financial institutions to have a small-dollar consumer loan.

It's a space historically dominated by payday lenders and other consumer finance outlets, who gained seedy reputations for their high fees. Regulators have urged banks to get into small-dollar lending for years, and in May issued guidance prodding banks to help consumers hurt by the COVID-19 pandemic.

Still, before Bank of America's announcement, among large banks, only U.S. Bank and KeyBank offered the kind of small-dollars loans that regulators sought despite customers indicating they want the loans.

"Clients were telling us that they can't make it quite there from paycheck to paycheck. So, this is a bridge," said Steve Boland, Bank of America's retail head, in an interview. The bank wanted all of its customers to do all their banking at the bank, he said, and not with higher cost alternatives.

Bank of America's loans — which cost $5 regardless of their size — will be paid back over 90 days in monthly installments. Customers are only allowed to have one out at a time, and can repay the loan early without penalty.

Successfully paying off the loan will also be recorded on a person's credit, potentially boosting their credit scores.

Questions remain

The product was cheered by some consumer advocates for its cost and utility, but questions still linger about how many bank customers will be able to use it.

"We need more institutions to offer small-dollar credit," said Jennifer Tescher, CEO of the Financial Health Network, in a statement. "It is encouraging that Bank of America has developed an alternative to overdraft and payday loans that is safe, transparent, and affordable, with the real potential to advance financial health."

It's good that a bank as large as Bank of America will offer the loans, said Alex Horowitz, a senior officer of the Pew Charitable Trusts' Consumer Finance Project.

He's waiting to see how widely available the loans will be, particularly if people with spotty credit will be able to access them.

"At a fundamental level, it's a good thing for banks to offer small loans to their customers who are struggling to make ends meet and have for a long time turned to paydays lenders, title lenders or pawn lenders," Horowitz said in an interview.

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