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Understanding the true cost of a loan


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Note: The content of this article and the examples shown below are based on the findings of True cost of a loan: A study by the Financial Health Network prepared for Oportun

More than half of all Americans (54 percent, according to a recent study) are living from paycheck to paycheck, and 71 percent say they don’t feel as financially healthy as they would like.

So it’s not surprising that you feel stressed when your car needs a repair, your child’s computer breaks, or you have a medical emergency. The challenge comes in two parts: First you have to deal with the crisis, and then you have to find enough money to cover the expense. Borrowing money can be costly, especially if your credit score is low or you have a limited credit history.

It’s important to know that lending options are not all the same. Some loans cost much more than others. To make the best choice for your circumstances, you’ll want to determine the true cost of a loan.

Here’s what we’re going to cover:

  • What goes into the cost of a loan?
  • Example 1: Diana’s $500 loan
  • Example 2: Jacob’s $1,500 loan
  • Example 3: Brad and Paula’s $3,500 loan
  • Oportun: Helping you move forward with less expense

Key takeaways

  • Lending options are not all the same. Some loans cost much more than others.
  • Understanding the total cost of a loan can help you make a smart decision, pay less in fees and interest, and reduce your stress when you need to borrow money.
  • The cost of a loan depends on several factors, including the loan amount, term, and APR. Most lenders will want to see your credit score when you apply for a loan.

What goes into the cost of a loan?

Suppose you borrow $500 and end up paying back $800 over the lifetime of the loan. Where did all that extra money go? Why did you have to pay $300 more than the amount you borrowed? And more important, could you have paid less?

The cost of a loan depends on several factors, including the interest rate, the loan term, and various fees. Lenders evaluate your risk as a borrower to determine what loans they will offer you and how much they will charge you. That’s why your credit score is so important: It gives lenders an idea of how likely you are to make payments on time. The higher your credit score, the lower your financing charges are likely to be.

If you’re considering a loan, here are some things you’ll want to look at closely.’

Loan amount

This is the total amount of money you borrow. If you’re making improvements to your home or receive an unexpected medical bill, for example, you might take out a loan to help cover the costs.

When deciding what options to offer you, a lender looks at the total loan amount in relation to your ability to repay the loan as a borrower.

Annual percentage rate (APR)

The annual percentage rate, or APR, tells you the annual cost of borrowing money. It includes the origination fees and interest you will be charged.

An origination fee is to cover the costs of making a loan and may be a percentage of the loan amount or a flat dollar amount.

Interest is the major cost of borrowing money. When deciding how much interest to charge you, most lenders will want to check your credit score.

Loan term

The loan term is the amount of time you have to pay back the money you borrowed. The longer the term, the lower your monthly payments will be.

However, a longer loan term can also make the cost of borrowing much higher. For example, if you borrow $1,000 with an APR of 30 percent;  loan term of 12 months and monthly payments of $97.50, you will pay $169.85 in interest. But if you select a longer term, your interest will increase over the life of the loan.

Other fees

Most credit cards charge an annual fee for the use of the card. This is part of the cost of borrowing money on your credit card.

And if you’re late making payments on either a loan or a credit card, you can be charged late fee(s). This increases your total cost.

Now that you understand what goes into the cost of a loan, let’s look at a few scenarios. What  are your loan options if you need to borrow $500? How about $1,500? Or $3,500? What will each option cost you? Here are some examples.

Example 1: Diana’s $500 loan

Diana has a yearly income of $37,500, and her credit history is limited. Her teenage daughter accidentally spilled water on the laptop she uses for school. The computer no longer works.

Diana’s daughter needs a laptop to do her schoolwork, so it’s important to get a replacement as soon as possible. What are Diana’s lending choices?

Get a payday loan

In this scenario, Diana takes out a $500 payday loan from an online lender who doesn’t require a credit check. She agrees to pay $23.53 for every $100 that she borrows (APR of 611 percent), over a two-week term.

But most of Diana’s monthly income goes into housing, food, utilities, and other necessities. So at the end of the term, Diana is unable to pay off the loan and she rolls over the loan for another term, still struggling to pay it off. After several rollovers, Diana pays more than three times the original loan amount.

Buy from a “rent-to-own” store

At a local retailer who does not require a credit check, Diana signs an agreement to pay $28.08 each week over a 49-week term for a new laptop. By the end of her loan term Diana has paid over $875 in interest and fees (APR of 266 percent), in addition to the $500 for the laptop.

Take out a personal loan

Diana has another option: She applies for a personal loan through Oportun even though she doesn’t have a credit score. Diana gets approved and agrees to an APR of 35.95 percent for a 12-month term. She makes payments of $22.43 every two weeks, and at the end of the loan term has paid only about $100 in fees and interest on her loan.

Example 2: Jacob’s $1,500 loan

Jacob supports his family on an annual income of $65,000.

One day Jacob’s car won’t start when he tries to leave for work. A local mechanic gives Jacob a quote of $1,500 to make the necessary repairs. Jacob needs his car for work, but doesn’t have enough cash on hand to pay the bill. Here are the options he considers.

Apply for a traditional installment loan

The local lender Jacob applies to conducts a credit check. Because his credit score is low, he is offered an APR of 40.31 percent and a loan term of 19 months. His monthly payments come to $106.17. At the end of the term, Jacob has paid more than $500 in interest and origination fees on the loan.

Charge it to a credit card

Jacob’s credit card charges him 19.10 percent fixed interest rate and a $52 annual fee. Jacob is already struggling to meet expenses, so he pays $165 or less  each month. It takes Jacob 44 months to pay off the money he owes on the car repair. This costs him $497 in interest and fees.

Take out a loan with a lower interest rate

Jacob heard about Oportun from a friend. After applying, Oportun conducts a credit check and offers a $1,500 loan with an APR of 35.41 percent for an 18-month loan term, which is better terms than the local lender. Jacob pays $52.13 every two weeks. At the end of his loan term, Jacob has paid roughly $400 in interest and fees.

Example 3: Brad and Paula’s $3,500 loan

Brad and Paula have a household income of $65,000 and a low credit score. One day they receive an alarming call from school saying their child is ill. The boy is rushed to the hospital and diagnosed with appendicitis. Fortunately, the surgery is successful and their son recovers well after spending a night in the hospital.

Brad and Paula have health insurance, but they still owe $3,500 in out-of-pocket expenses for their son’s medical care. What happens if they choose one of these options?

Take out an installment loan

Brad and Paula borrow the money from an online lender who does not require a credit check. Their APR is 164.06 percent, with a loan term of 22 months. Each month, they make a payment of $507.86. Brad and Paula end up paying roughly $7,800 in interest on the loan—more than twice the amount they borrowed.

Apply for a lower-cost loan

Brad and Paula apply for a loan through Oportun, which considers other sources of credit information. The couple is offered a loan with an APR of 34.55 percent for a 30-month term. They make payments of $83.65 every two weeks. Brad and Paula pay about $1,600 in interest and fees over the term of their loan.

Oportun: Affordable lending options designed with you in mind

Now that you understand lending options better, you can learn about how Oportun can help you.  If you are looking for affordable credit options, we can help.  Visit our homepage to learn about:



Cision. Nearly 40% percent of Americans with annual incomes over $100,000 live paycheck-to-paycheck

CNBC. Despite a strong economy, just 29% of Americans are financially healthy, according to a new report

Financial Health Network. True cost of a loan: A study by the Financial Health Network prepared for Oportun.

Investopedia. Personal loan calculator


The information in this site, including any third-party content and opinions, is for educational purposes only and should not be relied upon as legal, tax, or financial advice or to indicate the availability or suitability of any Oportun product or service to your unique circumstances. Contact your independent financial advisor for advice on your personal situation.

Personal loans through Oportun subject to credit approval. Terms may vary by applicant and state and are subject to change. If you refinance, you may pay interest over a longer period of time or at a higher rate and the overall cost of your loan may be higher. Loans in CA, ID, MO, NM and WI are originated by Oportun, Inc. California loans made pursuant to a California Financing Law license. NV loans originated by Oportun, LLC. In AL, AK, AR, AZ, DE, FL, GA, HI, IL, IN, KS, KY, LA, MI, MN, MS, MT, NC, ND, NE, NH, NJ, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA and WY loans are originated by Pathward®, N.A.. Terms, conditions, and state restrictions apply.

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