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Many Americans don’t have the cash on hand to finance some of life’s most important purchases – a new car or a house, for example. While it is not uncommon to take out a mortgage or car loan, many people are turning to personal credit, seeking to spread large purchases over a longer period.
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According to the recent Financial Health Network “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, over and above the principal. While a short-term loan has many advantages – flexibility, high borrowing limits, and no collateral requirement – you may have to pay significantly more money than what you originally borrowed.
The study model found that the average borrower – one with a subprime credit rating – who borrowed $ 500 through online-only installment loans ended up paying interest and fees of over 2,400. $ in addition to the principal. The $ 1,500 online-only installment and payday loans resulted in 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 for the average borrower modeled via the study.
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Find out: What is an FHA loan and how does it compare to a conventional mortgage?
“It can be difficult for consumers to assess 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 loan construction coupled with competitive interest rates can contribute to substantial savings for consumers.”
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