Many Americans don’t have the cash to finance some of life’s most important purchases – a new car or a house, for example. While take out a mortgage or a car loan is not unusual, many people are turning to personal loans, looking to spread out major purchases over a longer period of time.
According to the recent âTrue Cost of a Loanâ study conducted by the Financial Health Network, the type of loan you choose to obtain can cost you thousands of dollars over the life of the agreement, beyond principal. While there are many benefits to a short-term loan – flexibility, high borrowing limits, and no collateral requirement – you could be compromised for significantly more money than the amount you originally borrowed.
The study model found that the average borrower, one with a high-risk credit score, who borrowed $ 500 through online-only installment loans, ended up paying more than $ 2,400 interest and fees in addition to principal. The online-only payday and installment loans of $ 1,500 earned interest and fees more than twice the original loan from the hypothetical borrower, totaling more than $ 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 through the study.
“It can be difficult for consumers to assess loan costs, as credit products vary widely in their structures and rates,” said Marisa Walster, vice president of financial services solutions for Financial Health Network, according to SFGate. âThis rigorous analysis shows that responsible loan construction combined with competition Interest rates it can contribute to substantial savings for consumers. “
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This article originally appeared on GOBankingRates.com: A new study finds that the ‘real cost’ of obtaining a loan can more than double thanks to interest