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Many Americans don’t have the money to pay for some of life’s bigger purchases – a new car or house, for example. While taking out a mortgage or car loan is not uncommon, many people turn to personal loans to help spread out larger purchases over an extended period of time.
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According to the latest True Cost of a Loan study by the Financial Health Network, the type of loan you choose can cost thousands of dollars over the life of the arrangement, in addition to the principal amount. While there are many advantages to getting a short term loan – flexibility, high credit limits, and no collateral requirement – you could be hooked for significantly more than the amount originally borrowed.
The study model found that the average borrower – one with a subprime credit score – who borrowed $ 500 through online-only installment loans, pays over $ 2,400 in interest and fees on top of the principal. The $ 1,500 online installment and payday-only loan incurred interest and fees 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 to the average borrower modeled by the study.
See: Loans Without A Credit Check: Are They Worth It Or Should You Look Elsewhere?
Find: What is an FHA loan and how does it compare to a traditional mortgage?
“It can be difficult for consumers to estimate the cost of credit because credit products vary widely in terms of structure and fees,” said Marisa Walster, VP of financial services solutions at Financial Health Network, on SFGate. “This rigorous analysis shows that responsible credit management combined with competitive interest rates can deliver significant savings for consumers.”
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