What You Should Know About Installment Loans
An installment loan, also known as a loan paid back in installments, is a fundamental form of money borrowing that has been utilized by many to their benefit. These loans can be used in various situations, such as paying off a service or a high-priced item. With installment loans, equal payments are done on a scheduled basis over a set period of time until the full amount is paid.
Let’s see how installment loans work, how they differ from other loans and learn the benefits and downsides of this type of loan depending on the situation.
How does an installment loan work?
An example would be if you wanted to purchase a car from a dealership but did not have sufficient funds to pay upfront. But you need the car, so you resort to a loan. Two things are then set to occur: either the dealership sets up a loan for you or you go to the bank and ask for an auto loan. In either case, you receive the car and are instructed to pay off the car in two years with equal payments every month. Note that part of the payment will be kept by the lender (interest) for letting you borrow the money. This is known as an installment loan.
This differs from a payday loan, which would entail you to pay back the entire sum in one payment. Moreover, an installment loan contrasts with a credit card or line of credit in that you are given a single bundle of cash one time. Thus, you are not given the flexibility you would get featured in a line of credit.
Another aspect of an installment loan worth noting is the repayment period, which is often longer than other types of loans. A longer repayment term may mean the regular prices will be lower, but it also means that it will be accompanied by more interest. There are some cases where interest rates can vary. Moreover, once the installment loan is fully repaid, it is fully closed with a definitive end date.
Types of Installment Loans
Below are some common types of installment loans that may be worth considering depending on your situation.
In general, personal loans are multi-faceted in their use. You can use it for house repairs, consolidating debt, medical bills, etc. Moreover, typical terms range anywhere from two to five years and are typically unsecured.
Student loans are also unsecured. Student loans can often take a decade or longer to pay off as many borrow large amounts of money before they start earning sufficient money.
Auto loans are going to be secured, which means you would lose your car if you stopped paying. It is recommended to side on a shorter repayment schedule if you can to avoid high-interest rates.
Home loans are also going to be secured. These loans allow you to buy and live in homes that you can pay off over the course of many years. Some include adjustable interest rates that can shift over time along with the prime rate.
Benefits and Downsides of an Installment Loan
The various benefits of installment loans are why so many opt to use them.
- Gives you the ability to pay a large sum over time and not at once.
- The fixed repayment schedule encourages that the loan is paid off in a timely, consistent manner.
- Because most have fixed payments, you are given the liberty to budget around them along with always knowing how much you owe.
There are downsides to consider as well.
- Starting a loan can mean paying origination fees that some lenders may demand. You can also be penalized for trying to pay your debt faster than what was agreed. This leads to the next downside…
- Inflexibility in payments. In comparison, a credit card allows you to move down to the minimum payment for a few months if you needed to. Installment loans do not grant you this option.
- In the case where you needed more money, you would not be able to ask to borrow more money. Instead, you would have to apply for a new loan.
How to Get an Installment Loan
Before you apply for any loan, it is best to check the three digits of your credit score. These digits will tell lenders whether you are someone worth trusting and help them decide how much interest they want to charge you. That is if they approve your loan in the first place.
The next step is to find a loaner. This will depend on what type of installment loan you need. An important thing to keep in mind is remembering to compare not just the interest rate you’ll be charged, but also any other fees and options regarding the payment schedule.
The last step is to make a plan that allows you to consistently make your payments in a timely manner. The good news is an installment plan makes this process simple. Your job is to just follow it.