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Look at Installment Loans
6 Mar 2019

A Detailed Look at Installment Loans

Some people understandably find banking and finance terms to be confusing, and one of the most misunderstood terms out there is the term ‘installment loans.’ This might sound like a strange and rarefied product, but they’re actually something we’re all familiar with and that many of us have already used ourselves. Today, we’ll demystify this common product and talk a bit about some reasons why you might or might not want to use them yourself.

What Are Installment Loans?

Installment loans Canada might sound special, but they are actually just the standard loans that we all think about when we hear the word. You see, there are two main kinds of credit product out there: installment loans and lines of credit. With a line of credit, you have an open invitation to borrow money from a provider at any time you like, provided that the combined total of your borrowed sums does not exceed your credit limit. As you pay those debts back, you regain that space in your credit limit and can borrow again right away if you choose to do so. Your only obligation is to keep on top of your payments and never borrow more than you can afford; other than that, you have extraordinary amounts of freedom to borrow as you wish. This is the product umbrella that credit cards and home equity lines of credit fall under, so they’re not exactly uncommon arrangements in Canada.

Installment loans, however, are even more common than those. Even though that specific name is not used in every instance in which it technically applies, you’ll find these products in the repertoire of just about every lender out there. They take their name from the format they use, calling for the borrower to pay back the loan they take out in fixed installments rather than in fluctuating amounts as they go (although just as with credit cards, a borrower can pay more than the minimum amount due in each installment if he or she chooses to do so). You can get installment loans that are small and only require one payment from you, but they also exist in much more elaborate forms that can have you paying back the principal and interest for years. The key defining factor here is that the loan arrangement is a one-time deal; the borrower gets a single lump sum, pays it back over time, and then no longer has anything to do with the lender unless they choose to take out another loan later on.

What Kinds of Installment Loans Exist?

There are three main kinds of installment loans that are out there, and they are differentiated primarily by their size. These are:

  • Payday loans
  • Personal loans
  • Business loans

While payday and personal loans are geared toward individual consumers, business loans are, as the name suggests, meant to help fund budding entrepreneurial ideas or to keep existing but struggling businesses afloat. We won’t talk much about them here because business loan seekers usually look for their loans through separate channels, but it’s important to know they are out there.

Payday loans are the smallest type of installment loan there is. In fact, they are so small that they are often referred to as micro-loans. They rarely come in chunks of more than a few hundred dollars, and they are almost always meant to be paid back in just two weeks’ time. This is why they are called payday loans – they are over and done with in the span of just one typical payday. These are perhaps the most popular sorts of installment loans due to the ease with which they can slot into pretty much anyone’s life.

For those who need something a little bigger, though, the personal loan is there to fill in the gaps. These loans can be very large indeed, with the biggest among them easily reaching tens of thousands of dollars. They can be even larger than that if they happen to be structured as a mortgage, which is technically another type of personal loan tied to a specific purchase. Like business loans, though, those are typically relegated to their own channels. Most personal loans tend to hover in the range of a few thousand dollars, and these ones take much longer to pay back. You can usually choose the length of your repayment period yourself to suit your needs, but it’s common for you to be able to stretch that period as far as a few years if you want to.

What Are Installment Loans Useful For?

There is almost no limit to the things you could do with an installment loan of the appropriate size; just think about how much freedom a few thousand dollars can buy you in your daily life! A raise or sudden windfall of that magnitude can be life-changing, and everyone has some idea of what they might do with one if they got it.

Of course, not every potential use of thousands of dollars provides a good enough reason to justify taking out a loan and incurring the costs of the interest rate and other fees. Smaller payday loans are good for getting you out of small but pressing financial emergencies, such as paying a parking ticket before you lose your license. Larger personal loans are best used to finance significant purchases that you would have a hard time saving up to pay for in cash; many people use them to pay for home renovations, for example. Often personal loan purchases are not quite as urgent as what you’d use payday loans for, but you should still think about whether the extra expense of funding the purchase this way is worth it.

Overall, installment loans Canada of some kind should be your credit product of choice in almost every situation in which you are planning to borrow money. The only thing they are not good for is serving as a source of back-up funds over the course of months or years, as you will be paying interest on the sum you’ve taken out even if you aren’t presently using it. If you need a credit product that will serve this type of function, you’ll be much better off looking for a credit card or a line of credit that meets your needs. Otherwise, most money problems can be easily addressed with a loan.

Some Hazards To Look Out For

While they are incredibly useful tools that anyone would be happy to have at some points in their life, installment loans do have their potential dangers. The first is their size: they usually offer you very large sums of money, enough to make a major purchase like a car. While that gives them great utility as mentioned above, it can also be a double-edged sword. There are very few occasions in life where one really needs access to that much money all at once, but most people can come up with a use for it if it’s just sitting there in front of them. The trouble is that that use might be unwise for their long-term financial interests. Do you really need that new TV and sound system setup, PC gaming rig or set of flashy rims for your car, or do you just really want those things? An installment loan might make it possible for you to buy these things, but that doesn’t necessarily mean that you should.

The second notable hazard is their tendency to become very expensive over time. Because of their usual large size, installment loans Canada often take a very long time to pay off, and that means that you’ll spend a lot of time paying interest on the principal. Eventually, you will have paid a sum of interest comparable to principal itself, if the rates are high enough and you’re paying for long enough. This can make it extremely costly to borrow money in this way. Even smaller installment loans like payday loans carry very high interest rates that make them prohibitively expensive to use often, although your costs will be manageable if you stick to just one such loan every once in a while. This is why it is imperative that you do the necessary calculations to find out the final cost of the loan before you sign up for anything, just to make sure you know what you’re getting into.

Don’t Go Looking For Installment Loans – We’ll Bring Them To You

With this new information on what installment loans, perhaps you’ve decided that they are the product for you. If so, you’re in luck. We here at Bonsai Finance can help you sort through all the options available to you on the Canadian market so that you can get the exact one you want. One of our many partner lenders is sure to have the product with the right loan amount, interest rates and repayment period to suit your needs, so go ahead and take a look today.