Installment loans are a type of credit that you pay back in large chunks at predetermined times. This makes them different from other types of credit, like credit cards or lines of credit, which are sometimes called revolving credit. With revolving credit, you can borrow and pay back on your own schedule, though there is always a maximum amount to borrow and monthly minimums to pay back.
Examples of installment loans include car loans or student loans. You pay them back by the end of a certain period – usually three to five years. However, some types of installment loans, like mortgages, get paid back over longer periods.
When considering looking for an installment loan, there are a few things that you should consider. You want to make sure that you’re signing up for a loan that meets all your needs, with no surprises down the road.
Examples of Installment Loans: The Most Common Types
As already mentioned, student loans, mortgages, and car payments are the most common type of installment loans you can get. However, other common installment loans exist, like payday loans from alternative lenders. Installment loans are either secured or unsecured, depending on if you have collateral put in place to cover the loan. Mortgages and car or vehicle loans are both secured. This means that if you fail to meet your payment schedule, the lender will repossess your home or car.
Unsecured loans are personal or student loans. They are not tied to a specific piece of property. However, if you fail to repay your loans, your credit score will suffer, and the lender will likely take you to court to get their money back.
Advantages of Installment Loans
One of the largest benefits of an installment loan is that you know how much you’ll have to pay each month. This helps you budget your expenses. It also means that you know the exact amount your installment loan will cost by the time its finished.
This helps you shop around from different lenders. By looking at different time frames and different lending rates, you can find the cheapest installment loan possible.
Installment loans are therefore also a great way to build up your credit if you have a low credit score. Since you can budget and predict your loan payments, you can quickly raise your score. Furthermore, because some types of installment loans are secured, you can access them even with a lower score when compared to traditional loans.
Depending on your credit score and financial situation, it may make sense to use installment loans to consolidate your debt. By using an installment loan with lower interest to pay back credit card and other debts, you will have a single, lower monthly payment to pay back.
However, keep in mind that this is not a good idea if you have a poor credit score or if you’re only eligible for high-interest installment loans. Thankfully, you can easily price this out by looking at the terms of individual installment loans.
Disadvantages of Installment Loans
One of the largest disadvantages of installment loans, when compared to revolving credit, is that they have a fixed amount. While you can increase the limit of a credit card or line of credit, installment loans are a lump sum payment. You won’t be able to get another installment loan from the same lender until you pay your first loan off.
Further, while you may be able to get an installment loan even if you have a low credit score, it’s important to note that the terms of your loan depend on your score. Having a low credit score means that you may not be able to access as large of an amount of money as you may want. Additionally, having a low credit score means that installment loans can come with high-interest rates.
Some lenders will also charge origination fees. These are fees charged as soon as you receive the funds. An origination fee of 5 percent means that if your loan is for $1,000, you will only receive $950 as the lender charges you for the other $50.
You should also be wary of alternative lenders offering installment loans. Often, these lenders, who are not banks, will have stiffer penalties for missing a payment. Some lenders will offer grace periods, which can help your loan from moving to collections or legal action if you have a bad month.
In some cases, they may even impose penalties for paying back a loan early, as they will make less money off of the interest as a result. This is why you should always go through the terms of your loan carefully. These payments usually indicate that you’re borrowing from a less than reputable lender, and may end up paying more than you should in the end.
Apply for an Installment Loan Today
There are a number of different lenders that offer all the aforementioned types of examples of installment loans. Banks and credit unions are your best bet if you have a good credit score and low debt already.
However, if you have a low credit score and need to access funds, you may want to consider an online lender. Applications to many online lenders will not affect your credit score, and you can have a decision (and funds) within a matter of days.
For more information about online installment loans, feel free to check out the online loans section of our blog.