Heard the term “installment loan” but not exactly sure what it means? An installment loan is actually a common credit product. In fact, you might already have one or two of your own.
Installment loans—also known as installment credit—are closed-ended credit accounts that you pay back over a set period of time. They may or may not include interest.
Installment loans are a quick and simple way to meet your short-term financial needs. Your payment will be the same the entire time you carry a balance allowing you to easily budget your payments and know the exact date when the loan will be paid off.
Installment Loan Definition
When you’re looking to borrow funds, revolving credit and installment credit are the two available options. Installment credit is like a personal loan: you’ll repay your loan over a defined period of time in predetermined amounts. You’ll be able to easily factor this steady monthly payment into your budget.
An installment loan allows you to borrow a lump sum of money and pay it off over a defined period of time in predetermined amounts. You'll be able to easily factor this steady monthly payment into your budget.
When you're looking to borrow funds, revolving credit and installment credit are the two available options. With revolving credit, such as a credit card, you can expect to have monthly payments of various sizes depending on how you use it. Because of this, it can feel more difficult to manage revolving credit responsibly.
Other types of loans may require full repayment by a certain date. Payday loans, for example, are meant to be paid in full by the borrower’s next payday.
Examples Of Installment Loans
A few examples of installment loans include:
- Personal loans: A personal loan is a type of installment loan that can be used for almost anything the borrower needs. Approved borrowers will receive the loan in a lump sum and pay it back over the set repayment period. Loan amounts for personal loans typically fall between $1,000 and $50,000.
- Mortgages: Mortgages are larger loans used for home buying. Repayment periods for mortgages are typically 15 or 30 years, unless the borrower pays the loan off early.
- Auto loans: An auto loan is used to purchase a vehicle. The standard repayment period for an auto loan is 60 months. Going up to a 72-month loan or more can raise the amount you’ll pay in interest.
- Student loans: Student loans can help pay for higher education and typically begin their repayment periods following the student’s graduation. Interest rates and terms can vary between federal or private loans.
How Do Installment Loans Work?
When you seek out an installment loan, you apply for a set amount of money. You'll then repay that loan principal, along with interest, on a monthly basis. By the end of the loan term, you're expected to repay the total amount of the loan, plus interest.
Your rates can differ depending on certain factors, such as if you have a secured or unsecured loan.
What Is A Secured Installment Loan?
In some cases, an installment loan will require some type of collateral. For example, if you're using an installment loan to buy a home, then the home will serve as collateral for the lender. With collateral, a lender reduces the risk of lending you money because the value of your collateral will act as a recourse if you can't make your payments. With a mortgage, the lender could take possession of the home if a borrower defaults.
What Is An Unsecured Installment Loan?
In other cases, you won't have to worry about putting up collateral to secure your installment loan. For example, many types of personal loans don't require collateral. Without the requirement for collateral, the lender is taking on more risk since they will not have a way to recoup their losses if you’re unable to make your payments.
You'll need to pay attention to the monthly loan payment timeline. Although
an installment loan can allow you to make a major purchase right away, you
should consider the impact on your monthly budget before signing on the dotted
line.
Pros and Cons of Installment Loans
Like all types of credit, an installment loan comes with pros and cons. And whether it’s the right choice for you depends on your specific situation. Here are some points to consider:
Pros
- Ability to cover a large expense: Installment loans can give you fast access to the money you need for bigger purchases.
- Predictable regular repayments: With an installment loan, you know what your installment amount is going to be. And that can make budgeting easier.
- Chance of refinancing: If interest rates fall or if your credit score improves, you might get a chance to refinance. This could lower your monthly payments or shorten your repayment schedule. Keep in mind that there could be other costs and drawbacks involved with refinancing.
Cons
- Not open-ended: It’s unlikely you’ll be able to add to your loan amount if you find you need more.
- Potentially long commitment: Some installment loans come with long repayment terms. That means a borrower has to commit to making regular payments over a long period of time. And be sure to read through the loan’s terms and conditions to see if there are any penalties for paying the loan off early.
- You may be charged interest: Interest might not be charged on some installment loans. But keep in mind that if interest is charged, then the interest rate might depend on the type of installment loan and the borrower’s credit score. Those with lower scores may get higher interest rates. And the higher the rate, the more you could end up paying for the loan.
How to get an installment loan
- Compare. Lenders use different methods for assessing your loan application and assigning your rate, so it pays to compare installment loans from multiple lenders. Also consider other forms of financing, like low-interest credit cards or lines of credit, especially for big expenses.
- Pre-qualify. Getting pre-qualified for a personal loan or preapproved for a mortgage lets you see potential loan amounts, rates and payments without affecting your credit score. You can then assess how the payments impact your budget.
- Boost your application. Before you apply, consider a joint or co-signed loan or secure an unsecured loan with collateral. These options may help you qualify or get a lower rate or higher loan amount. Just know there are consequences if you're unable to repay the loan: your co-signer will be on the hook, or the collateral could be taken.
- Apply. Installment loans are offered at banks, credit unions and online lenders. The time required to apply varies by loan type and lender.
How much money can I borrow?
State laws regulate the maximum Installment Loan amount. These typically range from $50 to $5,000, depending on your state. The Installment Loan you receive is based on your eligibility and ability to repay.
Difference between installment loan and payday loans
An installment loan, as the name suggests, is generally a large amount borrowed from a lender that has to be repaid (with interest) every month. For- example, if you have borrowed $1,000 at 10% interest for 12 months, you’ll be paying $91.67 every month for 12 months.
A payday loan is a smaller loan for a shorter period that is offered on different terms and usually lower interest rates. This loan is offered on a “payday” basis, hence the name, payday loan and has to be returned on your next payday (the day when your salary is credited to your bank account).
An installment loan is a form of consumer credit in which the borrower gets a small loan and agrees to make a series of monthly payments to repay the loan. These payments are the “installments” that clear the loan.
Here’s how installment loans are different from payday loans: With a payday loan, the borrower writes a future-dated check for an amount equal to the sum being borrowed, plus a fee. At the end of the loan term, the borrower can either tell the payday lender to cash that check or get a new loan to extend the payment term.
In other words, payday loans are designed to be cleared by a single lump sum payment from the borrower’s checking or savings account, whereas installment loans are designed to be paid off in smaller chunks over time and don’t necessarily require the borrower to have a bank account.
Both payday loans and installment loans are generally marketed to low-income
Americans but installment loans in particular are often marketed to the
un-banked. Unlike payday lenders, installment lenders report loan activity to
the three credit reporting agencies. That means that whether or not you keep up
with payments on your installment loan can impact your credit score. This
can be a good thing if you are able to keep up with the payments. It can also
cause a drop in your credit score if you are not.
What is the easiest installment loan to get approved for?
The
easiest loans to get approved for would probably be payday loans, car title
loans, pawnshop loans, and personal
installment loans. These are all short-term cash solutions for badcredit borrowers in need. Many of these options are designed to help borrowers
who need fast cash in times of need.
What is considered a installment loan?
When
you take out an installment loan, you
immediately receive the money you're borrowing or the item you're purchasing.
You pay it off—sometimes with interest—in regularly scheduled payments, known
as installments. You typically owe the same amount on each installment for a
set number of weeks, months or years.
Are installment loans a good idea?
Installment loans can help your scores if: You pay on time. Installment loans can
help build credit if you are consistently paying on time and the lender reports
your activity to one or more of the credit bureaus.
Do installment loans require a credit check?
It
may be difficult to find a lender that offers installment loans with no credit
check. Luckily, there are many lenders
that don't require borrowers to have excellent or good credit. You may
be able to get approved for an installment loan and get the funds you need
quickly with a poor or fair credit score.
Do installment loans hurt your credit?
Installment loans will not negatively affect your
score as long as you are paying on time. That's because when you first get a loan,
credit agencies understand that the loan balance will be relatively high during
the beginning of its lifetime. Because of this, they forgive of large loan
balances.
How long does it take to get approved for an installment loan?
You
could be approved for a loan on the spot – often in just 10 minutes or less. Upon approval, you
will receive your cash right away. Apply Online – Complete your loan
application in a matter of minutes.
How many installment loans can I have?
You
can have 1-3 personal loans from the
same lender at the same time, in most cases, depending on the lender.
But there is no limit to how many personal loans you can have at once in total
across multiple lenders.
What's the difference between an installment loan and a signature loan?
Installment loans offer larger
loan amounts than signature loans, which usually offer smaller loan amounts. Signature loans
usually come with a shorter loan term and a shorter payment plan.
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