In this article
This article will discuss why you should apply for a $2,000 loan and not a $500 loan for an emergency expense. By using this method you may be able to get the lowest total cost when you need to borrow $500. It will cover the ins and outs of borrowing $500 as well as the strategy you could use to cut your cost of borrowing by taking out a $2,000 loan.
Who offers $500 Loans
Very few lenders offer $500 personal loans. Those that do usually fall into one of two groups: Payday Lenders and Short Term Emergency lenders. Both of these usually charge fees and interest rates that combine to exceed 100% APR.
But APR is a bad metric for short term loans. Instead, for loans lasting less than one year, total cost is a better measure. However, the actual cost isn’t easy to know. You need to know how loans will be used to get to their effective cost.
At the bottom of the article other low cost $500 loan options are discussed briefly. You should review these if you are in need of a $500 loan. However, they aren’t an option for many people.
Who offers $2,000 Loans
Many online lenders, banks, and credit unions offer $2,000 loans. That’s because $2,000 loans are seen as the lowest dollar amount that they can profitably offer loans and remain under 36% APR. That means moving from $500 loans to $2,000 loans changes which lenders are even going to look at your loan application.
$500 loan from a payday lender
Getting a $500 payday loan means you must repay the loan in one payment, usually within 2 weeks of borrowing. The typical cost of these is $20 per $100 borrowed. Therefore, in approximately two weeks you will repay the $500 plus the $100 fee. If you can’t pay it all, you can rollover the loan, paying the $100 and keeping the $500 for two more weeks. At that time, you will again be required to repay the $500 plus the $100.
The issue here is that most estimates put the reborrowing rate at 70% or higher. Meaning you almost certainly are going to roll over that loan. For most people, it’s 3 to 5 times before you repay the loan or default. Anyone who’s used payday loans before will likely attest to this fact.
Expected interest and fee cost for a $500 loan from a payday lender:
Low estimate $300 repaid in 6 weeks
High estimate $500 repaid in 10 weeks
$500 loan from a short term installment lender:
A short term installment $500 loan is both better and worse than a payday loan. It’s better because it describes the total cost of the loan by breaking down the loan into installments. The installments and the clear cost are great. The bad news is they cost basically the same as a Payday loan in terms of APR, but they are extended to a much longer term. That makes the total cost very high.
I used Plain Green Loans as an example. On their website they show an example of a $500 loan with 20 payments of $117. The payments are due every 2 weeks. That’s a total of $1,841 in interest. But they don’t charge a prepayment penalty, so you could pay off early. That’s worth noting because hopefully you would pay it off early. In fact, making a modest change and paying $125 every 2 weeks would cut 7.5 payments off of your loan and the total interest would drop to $1,037.
Expected interest and fee cost for a $500 loan from an online installment lender:
Modest estimate $1,037 repaid in 26 weeks
High estimate $1,841 repaid in 40 weeks
Summing up $500 loans
Clearly you can see these options are not good. But, they are available to people with poor credit.
Here’s what you don’t know about $500 loans, but what lenders do consider. For each customer, a lender expects to make, on average, about $500 in fees over the course of a year. This is what’s required to overcome all of their costs, especially losses and marketing. Here’s the real kick in the head, the higher they price the loan, the more expensive marketing gets and the more losses they take. In the end, the economics of a $500 loan just don’t work.
Applying for a $2,000 loan when you only need a $500 loan
The reason to apply for $2,000 is to open up the large portion of lenders who offer $2,000 loans but not $500 loans. This set of lenders are usually those who have maximum APRs on their loans of 36% or less.
You should always try to qualify with one of these lenders below going with a more expensive route, regardless of the loan amount you need. Note our personal loan matching does this for you. We first try our best to find a lender below 36%. If we cannot find one, we may be able to match you to higher priced loan options.
Important! For this to be of value to you, make sure the lender does NOT charge a prepayment fee. If they do, this probably isn’t a good fit.
$2,000 Personal Loan Costs
Many lenders offering interest rates under 36% for loans below $5,000 will charge an origination fee, up to 5% is common but more is possible. Let’s assume you are offered a $2,000 loan with a 5% origination fee and 30% interest rate for 24 months. With the origination fee, this is about 36% APR because the fee and the interest are part of the APR.
In this case, you receive $1900 but will pay back $2000 plus interest. The loan terms are about $112 per month for 24 months. Note the change here from biweekly payments on the $500 loan. If you kept the whole loan, you would pay $684 in interest plus $100 in fees over 2 years. That’s less than half the cost of the emergency loan.
Now we come to the secret! The day after you receive your funds, make a payment to principal on the loan in the amount of $1400, i.e. the money you don’t need. Then, make your regular $112 monthly payments in full over the next 5 months. Congratulations, your loan is paid off! You will pay $100 in fees plus $46 in interest on the loan this way.
Expected interest and fee cost for a $2,000 loan from a payday lender:
Low estimate $146 repaid in 5 months (requires $1400 immediate payment on the loan)
High estimate $784 repaid in 24 months (you also have to repay the $2,000 principal, not just the $500 as with the other loans)
Why aren’t $500 loans made like this
So, now you’re wondering, why don’t they just offer a $500 loan this way. There are a couple of reasons for this. Some of it is legal restrictions, and some of it is how lenders calculate the economics of their lending portfolios.
First, the way you paid the loan is substantially cheaper than a payday loan but if created in this manner, then the loan would have an effective APR of about 110%. This is because of the $100 origination fee, which the lender needs to cover the cost of making the loan. But an APR of 110% would violate the lending license for that lender in most cases. So they can’t do that. And if the lower the cost to adhere to the license then the $500 loan would be unprofitable so they can’t do that either. Hence, the reason why lenders have minimum loan amounts.
Secondly, because your $2,000 loan is part of a larger portfolio, it’s just part of the average. And the business economics on a portfolio of $2,000 loans is easier to manage. Most people will take the full 24 months to repay the loan, so it’s still a good program for the lender.
Why don’t lenders advertise using $2,000 loans for $500 emergencies?
In short, they don’t because doing so would violate multiple laws. Promoting a practice like this would be seen by regulators as being deceptive and an attempt to side step lending regulations. They would be fined for it! But lenders are fine with you doing this! It’s just they cannot legally tell you that you should. Even if it’s probably your option.
Other, lower cost $500 loans
PAL (Payday Loan Alternative) from a credit union:
These are probably the best $500 loans you can get. First, the Interest rate will be 28% or less. Plus an application fee of $20 or less. The downside is that very few credit unions offer these loans and you usually have to have been a member for between 30 and 120 days to be considered. If your credit union offers them, this should be your first stop!
Friends and Family:
If you have friends or family that can help you out in a pinch and loan you $500, that’s great and you should get that help. Most people don’t have this option.
Credit Card Cash Advance:
Putting $500 on a credit card, even via a cash advance, will be much cheaper than a $500 payday loan. But the value is decreased if you are only making the minimum payments on your card. If you can use a credit card to cover the shortfall and pay it off in a few months, this is a good option.
Pawn Loans:
These are only slightly less expensive than payday loans and require you to have something of value. It’s an option, but not great. They operate similarly to a payday loan but usually at about half the cost. If you have something you can pawn to get a $500 loan then this may be a worthwhile choice.
Nonprofits, community groups, and government assistance programs:
These are wonderful when available. The problem is, they are hard to find and may not exist in many locations. You should try a google search in your area to see what is available. Unfortunately, very few places like this exist to offer $500 loans.
