How Does a Loan Actually Affect a Borrower's Finances?
Comparing loans to determine which is more affordable isn’t as simple as comparing Annual Percentage Rate (or APR). While APR is helpful when comparing loans of the same type, it is less helpful when you’re trying to compare loans with very different payment structures (a two-week balloon payment loan versus an amortizing installment loan over 10 months, for example). APR doesn’t tell you whether the payment amounts and due dates are realistic given the borrower’s income and cash flow and whether they are likely to be successful in repaying the loan without incurring late fees or having to take out a new loan to repay the first.
To understand the real cost of the loans available to people with little or no credit history – and how Oportun loans compared in terms of affordability – the consulting arm of the Center for Financial Services Innovation (CFSI) created a model that analyzed how borrowers would fare in repaying the different kinds of loans people with little or no credit history typically turn to, like payday, auto-title, pawn loans, and Oportun’s installment loans. Key data also included CFSI’s own research on how borrower needs drive credit choices and data gathered on the most popular and widely available credit options in Oportun markets (Arizona, California, Illinois, Nevada, Texas, and Utah).
The research sought to answer such questions as:
- Given borrowers’ income and cash flow, how likely is it that they would be able to repay the loan as indicated in the contract?
- Would they likely incur late fees and/or be obliged to take out another loan to pay off the first?
- How much would that original loan end up costing them in the end?