New study: What does it really cost to take out a small loan?

New study: What does it really cost to take out a small loan?

(BPT) – If you’ve ever had a financial emergency – like a car breakdown or unexpected medical bills – you know how stressful it is. Especially if you have no savings and little or no credit history, borrowing a small amount of money may seem like your best option – but not all loans are created equal. Make the wrong choice, and you can end up paying several times more than the amount you borrowed, when you can least afford it.

A new study reveals how much people lose by borrowing money from sources like payday loans or online installment loans. High interest rates, balloon payments and fees can send you into a downward spiral of debt that increases over time, further damaging the credit history you wanted to build. The new ‘True Cost of a Loan’ study by Financial Health Network and commissioned by Oportun shows how the kind of loan you choose can cost thousands of dollars over the life of the loan.

What to look for in a loan

In the study, people without a credit score or a marginal credit score (near prime and below) or a solid credit history who borrowed small dollar amounts like $500 through online-only installment loans ended up paying interest and fees of over $2,400 over the life of that loan.

How do you know how much a loan will really cost you? Certain types of loans are likely to be far more expensive in the end. The True Cost of a Loan study found:

  • Online-only installment and payday loans incurred interest and fees totaling over $3,000 on a loan of $1,500 – tripling the borrower’s original loan.
  • Typical $3,500 payday loans were the costliest, adding a whopping $10,775 in interest and fees over time.

Before you borrow money, research or ask questions like:

  • What is the interest rate?
  • Is that rate fixed, or could it change?
  • What are the terms of repayment?
  • Are there origination or other fees added to the cost?
  • What fees are charged if you miss a payment or can’t repay the loan?

‘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, Financial Health Network. ‘This rigorous analysis shows that responsible loan construction paired with competitive interest rates can contribute to substantial savings for consumers.’

Better options for borrowing and building a credit history

One option to consider is a loan from Oportun, which the study found to be six times more affordable than other available loans of equal amounts, on average for non-prime credit consumers, including those with little to no credit. The company uses advanced data analytics and 15 years of consumer insights to serve low- and moderate-income consumers with a responsibly structured, easy-to-understand, unsecured installment loan with fixed payments and fixed interest rates throughout the life of the loan. This contrasts with many other loans that are built for failure, as those companies make their money on fees.

‘The reality is that the people who most need affordable credit often pay the greatest amount in interest and fees,’ said Matt Jenkins, COO and general manager of personal loans for Oportun. ‘But we have designed our loans to help borrowers succeed in repaying them.’

Loans from Oportun are structured to:

  • have no prepayment penalties
  • have no balloon payments
  • charge below 36% Annual Percentage Rate (APR)
  • range from $300 to $10,000
  • have repayment terms of 12-48 months

Using artificial intelligence (A.I.) to evaluate credit risk, the company scores 100% of its loan applicants – even those with no credit history. By reporting its customers’ repayment performance to major credit bureaus, Oportun has also helped over 945,000 people begin establishing their credit history.

To learn more about understanding credit reports, how to build your credit history or to apply for a loan, visit


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