With low interest rates, American consumers are borrowing more than ever. Now lenders have new ground: installment loans.
Recently, advertisements for loans seem to be everywhere – on the radio, on television, and even following you on the Internet. The selling proposition looks like this: Want to consolidate your debt? Pay off your credit cards? You can get approval the same day to borrow tens of thousands of dollars.
While 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 have rushed to enter the market.
While these loans can be useful in some situations, poor oversight means lenders “often obscure the true cost of borrowing and expose customers to financial risk,” the Pew report concludes.
Cost vs convenience
While installment loans can help you pay off other types of debt, you pay a price for this convenience. These loans generally carry higher rates than personal loans from banks, credit unions and home equity loans. Additionally, some charge an upfront fee that is prepaid and not included in your loan, as would be the case with a mortgage.
Once you have calculated the loan terms, the total debt repayments can add up. For example, through LendingTree, an aggregator of loan companies that compete 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. The total debt payments amounted to over $ 11,000.
If you own a home, a cheaper alternative to a high interest installment loan for homeowners may be your mortgage company. Since home buyers are reaping the rewards of historically low mortgage interest rates, a home loan or cash refinance loan may offer a more competitive rate. In mid-November, for example, home equity loans were averaging 5.77%, according to Bankrate.com.
Credit unions are another choice, especially for people with a lower credit rating. 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 often charges a nominal annual membership fee of around $ 25, but it’s worth it in terms of the savings over time. The average APR on three-year personal loans from federal credit unions was 9.29%, according to NerdWallet.
Other possibilities for small amounts for those who do not own a home are credit cards which 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 drops from 15% to 27%. However, opening a new credit card could affect your credit score.
You can find our picks for the best balance transfer credit cards here.