Installment loans can be expensive

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With interest rates low, American consumers are borrowing more than ever. Now lenders have a new pitch: installment loans.

Lately advertisements for loans seem to be everywhere – on the radio, on TV, even following you on the internet. The sales proposal looks like this: Do you want to consolidate your debts? Pay off your credit cards? You can get same day approval to borrow tens of thousands of dollars.

Although these loans have been around for years, the latest iteration, which began at the onset of the recession around 2008, has since proven popular. Each year, nearly 10 million Americans borrow between $100 and $10,000 and pay more than $10 billion in finance charges, according to a 2018 study by Pew Charitable Trusts. Big companies like Goldman Sachs and US Bank rushed to enter the market.

While these loans can be useful in some situations, poor oversight means lenders “often mask the true cost of borrowing and put customers at financial risk,” the Pew report concludes.

Cost vs Convenience

Although installment loans can help you pay off other types of debt, you pay a price for this convenience. These loans typically come with higher rates than personal loans from banks, credit unions, and home equity loans. Additionally, some charge upfront fees that are paid upfront and not included in your loan, as would be the case with a mortgage.

Once you’ve done the math on the terms of the loan, the total debt repayments can add up. For example, through LendingTree, an aggregator of lending companies competing for your business. According to a test, an applicant with good credit received an APR of 13.49% on a loan of $50,000 over three years. The best case scenario was a loan with a monthly payment of $1,697. Total debt payments were over $11,000.

If you own a home, a cheaper alternative to a high-interest installment loan for homeowners may be your mortgage company. As homebuyers reap the benefits of historically low mortgage interest rates, a home equity loan or refinance loan may offer a more competitive rate. In mid-November, for example, home equity loans averaged 5.77%, according to Bankrate.com.

Credit unions are another choice, especially for people with lower credit scores. Rates are generally lower than traditional banks and they are used to working with people at the lower end of the credit scale. A credit union will often charge a nominal annual membership fee of around $25, but it’s worth it in terms of savings over time. According to NerdWallet, the average APR on three-year personal loans from federal credit unions was 9.29%.

Other options for small amounts for those without a home are credit cards that offer a 0% balance transfer period of 12 to 18 months. These cards often come with a transfer limit of $2,500 and fees of $250 to $500. Outside of the balance transfer period, the APR typically increases from 15% to 27%. However, opening a new credit card could affect your credit score.

You can find our selection of Best Balance Transfer credit cards here.

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