A lot of Americans don’t have the cash on hand to finance some of life’s larger purchases — a new car or a house, for example. While taking out a mortgage or a car loan is not unusual, many people are turning to personal loans, seeking to spread out major purchases over a longer period of time.
According to the recent “True Cost of a Loan” study by Financial Health Network, the kind of loan you choose to take out can cost you thousands of dollars over the life of the arrangement, above and beyond the principal. While there are plenty of benefits to a short-term loan — flexibility, high borrowing limits and no collateral requirement — you could be on the hook for significantly more money than the sum 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 over $2,400 in addition to the 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 priciest 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 via the study.
“It can be difficult for consumers to assess loan costs as credit products vary widely in their structures and fees,” said Marisa Walster, VP of financial services solutions for Financial Health Network, per SFGate. “This rigorous analysis shows that responsible loan construction paired with competitive interest rates can contribute to substantial savings for consumers.”
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This article originally appeared on GOBankingRates.com: New Study: What’s the ‘True Cost’ of Taking out a Loan?