25 Sep Installment Loan: Types, Pros, and Cons
An installment loan refers to both personal and commercial loans that are extended to borrowers and that require regular payments. Each of the regular payments for the loan includes a portion of the principal amount, as well as a portion of the interest on the debt.
Installment loans allow individuals to borrow a fixed amount of money, distributed in a lump sum, that can be repaid over time. Naturally, these loans come with a fixed interest rate and require regular monthly payments that remain the same for each month. A share of each monthly payment is applied to the principal amount borrowed, and a share is applied to the interest on the loan.
Installment loans differ from credit cards, which typically have more flexible repayment terms and variable interest rates. This means that you don’t have a predictable monthly payment. With installment loans, you will always know what to expect when your monthly bill is due.
How to Obtain Best Installment Loans?
While applying for an installment loan from any financial institution, first the borrower visits the credit department of the lender to discuss the terms and conditions of the loan. This generally includes the loan amount, down payment, loan duration, interest rates, the purpose of the loan, etc.
Once the borrower is satisfied with the loan process, he/she is required to fill out a loan application form. The borrower is required to provide personal information (name, physical address, occupation, etc.), amount of loan requested, the purpose of the loan, collateral provided, etc.
Once the loan application form is submitted to the bank, the lender initiates the evaluation process in order to determine the ability of the borrower to meet the loan requirements. The borrower may also be required to provide additional information, such as recent financial statements, proof of ownership of the collateral, evidence of current cash flows, etc.
The lender may also ask for the borrower’s credit report to get information about the latter’s credit history for the past years. If the lender is satisfied that the borrower is creditworthy, the application will be approved, and the funds will be disbursed.
If the lender finds that the borrower presents a high risk, they have the right to choose to reject the application. Or to extend credit but at a high-interest rate to compensate for the increased risk.
Types of Installment Loans
The most common types of installment loans are personal loans mortgages and auto loans. Most mortgages and car loans usually require good credit and an extensive screening process for approval. These are then paid back in monthly installment over the years or decades.
While personal loans are easier to obtain than mortgages and auto loans, especially for low-income consumers, they also tend to have higher interest rates associated with them.
Personal Loans
A personal loan is a type of installment loan that borrowers use to pay off urgent expenses, such as college tuition, wedding costs, or medical expenses. The duration of a personal loan can vary from 12 months to 60 months. Most personal loans charge a fixed interest rate, and borrowers are required to make fixed monthly payments for the loan’s duration.
Mortgages
A mortgage is a type of installment loan that is borrowed to purchase a house. It comes with maturity periods of 15 to 30 years (or more). Here the borrower has to make monthly repayments until he/she pays the total loan amount.
Most mortgages come with a fixed interest rate, where the future monthly principal and interest payments remain constant throughout. An alternative to fixed interest rate mortgages is the adjustable-rate mortgage. In this, the interest rate is fixed for the initial term of the loan, after which the interest rate fluctuates with market interest rates.
Auto Loans
An auto loan is a type of installment loan that is borrowed in order to purchase an automobile. Such loans usually come with a loan duration of 12 to 60 months, or more, depending on the lender and the loan amount.
The lender provides the borrower an amount equivalent to the cost of the motor vehicle. And the borrower agrees to make monthly payments towards the loan until it is fully paid. The vehicle purchased using the funds becomes the collateral for the loan. If the borrower defaults on the payments, the collateral will be repossessed and sold to recover the loan amount.
Pros and Cons of Installment Loans
Installment loans aren’t inherently good or bad. Whether they’re helpful or harmful to you depends on your credit score, current financial situation, and borrowing needs.
However, we have discussed here some basics pros and cons of an Installment Loan………
Pros of Installment Loans:
Installment loans have many advantages. A few includes:
- Constant Monthly Payments: Monthly payment remains the same or consistent for the duration of the loan. This makes it easier to create a household budget and pay bills on an ongoing basis.
- Credit Score Boost: Establishing a clean payment history with no late payments on an installment loan helps to improve credit score.
- Refinancing Opportunities: If interest rates fall or your credit score improves, refinancing into a new loan can be helpful. This is because it will likely lower the monthly payments on your loan or reduce the length of the loan.
Cons of Installment Loans:
If you’re thinking about taking out an installment loan, make sure to take into consideration some of its drawbacks:
- Fixed Payment: Since installment loans deposit funds in a lump sum value, you can’t increase the amount borrowed if you run into a new financial hurdle or emergency.
- Potentially Long Payment Schedule: Installment loan payment periods are generally lengthy. Therefore, it is important to make sure you’ll be able to make the payments on time each month for the entire length of the loan you’re agreeing to. Equally, if you’d like to pay off your loan early, be aware of any prepayment fees your lender may charge.
- May Be Expensive for Poor Credit: The interest rate you receive from this mainly depends on your credit score. For e.g. Installment Loans for Bad Credit is much higher than for good credit score. If you have below-average credit, you may be denied a loan. Or you may get a high-interest rate that will make your monthly payments more expensive.
- Potential Fees: If interest rates decline, you can opt to apply for another personal loan too at a lower rate. However, you may have to pay another origination fee to process the loan.
Getting Guaranteed Installment Loans for Bad Credit is a little bit tougher than for a good credit score. So, to get instant approval first consider redeeming your credit score.
Where to Get an Installment Loan?
You can get Installment loans through a bank, credit union or you can also consider Direct Lender Online Installment Loans Instant Approval. Shopping and checking around will help you receive the lowest fees and interest rates.
Many Lenders (Online Installment Loans Instant Approval) allow you to apply for a mortgage, car loan, or personal loan online. Personal loans often get approval within a few days. While auto loans and mortgages require a more extensive check into your credit history and credit score.
No matter what type of loan you’re seeking, first check rates from a few Best Installment Loans lenders before committing. Many lenders offer Online Installment Loans No Credit Check, but as discussed earlier, the interest rate is very high.
Many lenders also offer Online Installment Loans Instant Approval or prequalification. It is a process in which you enter a few details about yourself. And your desired loan terms in exchange for a quick decision about whether or not you’d qualify for a loan with that lender. This uses a soft credit check, meaning your credit score won’t be impacted.
How to Know If an Installment Loan Is Right for You or Not
Taking out an installment loan will affect both your budget and have a long-term impact on your credit.
Therefore, we always recommend, whenever you receive a loan offer, first look for Cheap Installment Loans. Also carefully assess whether you have room in your budget for a new monthly payment or not. For this, you can use an Installment Loan Calculator.
Also, consider will you still be able to make your payments if you have a financial emergency?
Do you have a savings buffer to help in those situations?
If you’re ambiguous that you can comfortably pay off the loan within the repayment period. Also, try talking with your lender about options for updating the offer. Possibly you need a longer-term so your monthly payment will be lower or a smaller loan.
Another option is to consider loan alternatives, such as a credit card, for certain purchases. While credit card interest rates can be higher than personal loan rates. Many have introductory offers of 0% APR for 12 to 18 months, giving you the ability to pay off your balance without paying interest.
So, before using a 0% APR credit card, make sure you take note of the regular APR that you can afford payments. whether you are using installment loans or credit cards, use it responsibly. As you’ll have the opportunity not only to meet your financial goals but also to keep your credit rate strong, too.
The Takeaway
If you’re considering an installment loan, first make sure you understand the terms and conditions of the loan you’re agreeing to. If you understand what’s being offered to you. Then only you can thoughtfully shop around for the best installment loan for your particular situation.
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