Andrew L. Wang, a staff writer at NerdWallet, the personal finance website recently wrote about the Pros and Cons of CDFI loans. Below is what he reported.
Low-interest rates: Rates for CDFI loans are competitive with those you will likely find from other sources, such as banks that issue Small Business Administration loans. A study of CDFI financing commissioned by the CDFI Fund found that the median interest rate in 2012 for a CDFI-originated business loan with a 48-month term was 7.75%. In comparison, rates in April 2017 for an SBA 7(a) loan under $25,000 and paid off under seven years were around 8%. Rates for online lenders are generally higher and can reach into the high double digits.
Higher likelihood of approval: CDFIs generally are more likely to extend credit to borrowers that traditional banks would deem too risky, says Ayrianne Parks, a spokeswoman for the CDFI Coalition, a Washington, D.C.-based advocacy group. The proof is in the numbers. According to the Federal Reserve survey, the approval rate for small businesses that applied for loans or lines of credit from CDFIs was 77%. That was higher than at online lenders, credit unions or banks of any size.
Simpler products: The financial products CDFIs offer generally are “plain vanilla,” according to the CDFI Fund study, meaning they’re designed to minimize the borrower’s risk. Most of the loans are fixed-rate, which means the borrower’s payments are predictable. In addition, they’re self-amortizing; as borrowers make payments, they’re paying interest and chipping away at the principal so that the loan is paid off at the end of the term. Origination fees are low, and in many instances, nonexistent.
Longer funding time: The application process and time to funding can take longer at CDFIs than at other types of institutions. CDFIs generally have fewer assets than banks, so a loan application may take longer to process related to capacity issues.