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Need a small loan? Make sure you're not adding to your financial woes
(BPT) - April is Financial Literacy Month, and it’s an opportunity for people to take a closer look at their finances and be smart about their money. These days, it's difficult to save money — whether it's an appliance breakdown, car repair or other unexpected bill, sometimes you just need to borrow a little cash. When you need to find a little financial help, it may seem like plenty of options are out there for borrowing money. But the problem is, borrowing even a little can cost you. A lot. Even if you need just a small loan — but you don’t have much of a credit history (or none at all) — you may find yourself owing a lot more than you can afford, causing bigger problems down the road. If you don’t have a solid credit history, you may find yourself in deeper financial trouble just from borrowing as little as $500.
“Unfortunately, just when you really need a loan, you can end up owing a lot more than you can afford,” said Matt Jenkins, chief operations officer, Oportun. Oportun’s customers, the majority of whom live in low- and moderate-income communities, are hardworking individuals who have limited savings. Approximately half of Oportun’s new loan customers did not have a FICO credit score when they first came to Oportun. “Understanding how much you’re expected to repay for any loan, and when, is crucial, so you don’t end up in a deeper financial hole.”
This is especially true with unsecured loans such as payday loans or online-only installment loans, as well as short-term secured loans such as auto title loans. While you may have needed to borrow just a small amount, after adding interest and fees, you could ultimately end up paying back many times more than the original amount you borrowed.
Unsecured versus secured personal loans
Personal loans fall into two categories: secured or unsecured. Secured loans require you to offer up an asset as collateral, while unsecured loans do not. Secured loans can give you access to larger loan amounts, especially if you don’t have as much credit history to qualify for an unsecured loan. However, being unable to pay back your secured loan could result in losing access to the property you put up as collateral — such as your vehicle — which creates even more challenges, especially if you need your vehicle to get to work.
Unsecured loans place a greater risk on the lender, since the borrower does not provide collateral. To account for that risk, lenders may offer unsecured personal loans in smaller amounts, charge higher annual percentage rates (APRs) and/or require the borrower to have a much higher credit score to qualify. These requirements can create barriers to accessing or building credit for anyone who is financially struggling.
How much borrowing can cost you
To find out how much these products can really set you back, a 2022 analysis by the Financial Health Network, “The True Cost of a Loan,” compares six financial products — payday loans, online-only payday loans, rent-to-own, installment loans, online-only installment loans and single-pay auto title loans — to unsecured installment loans from Oportun to estimate the total cost of these products to typical borrowers.
The study showed that even short-term, small-amount loans can end up being very expensive to borrowers in the long term, especially when compared to loans from Oportun. Across three loan amounts, alternative products could cost eight times more on average than an Oportun loan of an equal amount:
- For a $500 loan, alternative products could cost ten times more on average than an Oportun loan.
- For a $1,500 loan, alternative products could cost six times more on average than an Oportun loan.
- For a $3,000 loan, alternative products could cost four times more on average than an Oportun loan.
Overall, Oportun loans can be significantly less costly than alternative products, as they often have lower rates and more affordable terms than many other choices on the market.
To learn more about your options to borrow money when you need it, as well as financial resources, information and tips to help you build a better credit history, visit Oportun.com.
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