Many Americans lack the cash to finance some of life’s biggest purchases – a new car or a home, for example. While it is not uncommon to take out a home loan or car loan, many people are turning to personal loans, seeking to spread major purchases over a longer period.
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According to the Financial Health Network’s recent “True Cost of a Loan” study, the type of loan you choose to take out can cost you thousands of dollars over the life of the arrangement, beyond the principal. Although a short-term loan has many advantages – flexibility, high borrowing limits and no collateral requirements – you may end up paying a lot more money than you originally borrowed.
The study’s model found that the average borrower – one with a subprime credit score – who borrowed $500 through online-only installment loans ended up paying interest and fees of more than 2 $400 plus principal. Online-only installment and payday loans of $1,500 incurred interest and fees of more than double the hypothetical borrower’s original loan, totaling over $3,000.
The most expensive loan option covered by the data was a payday loan. A $3,500 payday loan added $10,775 in fees and interest over time for the average borrower modeled by the study.
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“It can be difficult for consumers to gauge loan costs because credit products vary widely in their structures and fees,” said Marisa Walster, vice president of financial services solutions for Financial Health Network, per SFGate. . “This rigorous analysis shows that responsible construction of loans combined with competitive interest rates can contribute to substantial savings for consumers.”
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