There are different kinds of financial products and forms of credit out there, however, an installment loan is a particularly common one.
An installment loan can be defined as a kind of credit or loan that is available to consumers to deal with any kind of expense. You can also use an installment loan to purchase your house or car.
Borrowers receive a lump sum amount of money through an installment loan. It is generally paid back in the form of scheduled monthly installments over a fixed period of time.
Almost all installment loans have a fixed rate of interest that means the rate of interest will remain the same throughout the course of the repayment of the loan. However, certain installment loans like kinds of mortgage loans might have varying interest rate.
As the loan term begins, your scheduled loan payments will go towards paying off the interest on the amount of money borrowed. The rate of interest is usually higher during the start of the loan. When borrowers continue to pay the installment amount on a regular basis, money will be used to pay off the principal. This is the remaining amount of loan minus the rate of interest.
Installment loans are kind of personal loans that determine your creditworthiness based on your overall financial situation and credit history. The terms of the loan will be more favorable if you’ve a higher credit score. Your rate of interest will be lower if you have a favorable credit score.
What Are The Types Of Installment Loans?
There are different types of installment loans. They vary based on what you’re about to purchase. You will need collateral in case you are applying for auto loans and mortgages. Credit cards, different lines of credit, and payday loans are not installment loans.
Borrowers pay back predetermined installments on car loans over a fixed duration of time. Banks, credit unions, car dealership, and online lenders issue such loans to borrowers. In case a borrower fails to pay an auto loan, their car will be used as collateral. It will be repossessed.
Personal Loans can finance anything from home improvements to car repairs, debt consolidation to an unexpected expense, or medical bills. Personal loans can be both secured or unsecured loans.
In case of a secured loan, a collateral is used to guarantee the repayment of your loan. There is no collateral used for unsecured loan. If you’re using a loan to pay for your home, your home will be treated as collateral in case you fail to pay the lender the loan amount.
Student loans are repaid over a fixed amount of time. Your credit score will be impacted the same way by student loans as any other loan. Federal student loans are unsecured personal loans because they don’t require any collateral.
A 30 year or 15 year mortgage over a fixed period of time is called as installment loan. During the life of the loan, the rate of interest and principal stay the same. In case of default on the mortgage, your property can be foreclosed.
Can Your Credit Score Be Affected By An Installment Loan?
Before applying for a credit card or a loan, it is crucial to get a credit check done. When lenders perform a thorough investigation on your credit report, it can have an impact on your credit score. This might result in the drop of your credit score, especially when multiple credit score inquiries are conducted over a short span of time.
Your credit score will fall when a rigorous credit check is conducted. This could be detrimental depending on the personal financial situation that you’re currently in. However, your credit score will improve once you start making on-time monthly payments.
Installment Loans will enable you to build a positive credit history if you make regular monthly payments. On the other hand, making late payments or missing out on a payment will have a negative impact on the credit score.
Installment Loans will also have an influence on your credit mix. This is the variety of debt showing up on your credit report. Your length of credit history will also be affected by this.
What Are The Advantages of Installment Loans?
Every financial product has its own set of pros and cons. This will depend on your ability to make payments on time and your financial situation.
These are the pros of using an installment loan –
You will have to pay a fixed amount of money to your lender every month. The rate of interest will remain unaffected throughout the term of the loan. You can keep a budget for your loan repayments.
Build Credit History
When you continue paying your installments on-time throughout the course of your loan term, it will have a massive impact on your credit score (if your lender reports your loan performance to the credit reporting agencies). Paying your loan installments on time will prove to creditors that you’re a trustworthy borrower. It shows how responsible you’re towards the credit that has been extended to you.
Paying For Large Purchases
Borrowers will be able to pay for expenditures that they won’t be able to afford otherwise. Installment loans will enable you to pay for cars or home improvements right away rather than going through the tedious task of saving for years. Any kind of big purchase can be done right away with installment loans.
You have to pay off the due amount by the end of every month to steer clear from accruing interest.
The terms of installment loans can vary from a few months to several years and sometimes decades. Longer term is required to pay back larger expenditures like purchasing a car, a house, or college tuition in comparison to a loan necessary for smaller personal expense or an auto repair.
What Are The Drawbacks Of Installment Loans?
Not every kind of installment loan is the same. You must be familiar with the terms and conditions applicable on the loan along with the drawbacks. Here are certain things to keep in mind:
Fixed Loan Amount:
You’ll be limited to a fixed sum of money when you apply for an installment loan. Once you’ve paid off the installment loan, you have to apply for another loan to take care of your other needs. However, credit cards or revolving credit products don’t have to renewed. You can use the same credit card for years.
There are lenders who charge late fees, origination fees, application fees, and/or prepayment penalties. Select a lender that offer the most favorable conditions by conducting an extensive research on the loan options.
There are lenders who will charge a higher rate of interest on installment loans. Borrowers usually have to pay for a long period of time which will cost you more interest over time. In case you’ve a bad credit score, you will have to pay more rate of interest.
How To Get An Installment Loan?
After you have filled a loan application, lenders will ask for your personal financial information. This will be used to determine an individual’s creditworthiness. Lenders vary from one another and have their own approval procedure. Your credit history, credit score, proof of income, and debt-to-income ratio will be considered.
Collect your personal documents and conduct an extensive research on lenders to find who is best suited for you, and then proceed to apply for the loan. In order to prevent too many extensive inquiries about your credit history apply for one loan at a time.
Where Can You Avail An Installment Loan?
Installment loans are offered by banks, online lenders, and credit unions. Your choice of installment loan will vary depending on the kind of expense that you’re looking to finance.
Installment loans have no particular type. Every financial loan provider has their own set of offerings. You must compare the loan amounts, repayment terms, interest rates, and fees to understand which installment loan suits your financial goals perfectly.