Is your current credit rating cramping your style? Installment loans could be the answer to improving your credit score and saving you money in the process.
Unlike payday loans that have to be paid back at once, installment loans give you time to make your repayments in a flexible way that fits right into your lifestyle. So why not add to your credit mix by taking on a new type of account?
Here’s a comprehensive guide into installment loans 101. Read on to learn all about them and determine if they’re right for you.
What Are Installment Loans
As the name suggests an installment loan is a type of credit where customers borrow a set amount of money and pay it back in a fixed number of monthly payments. These payments are referred to as “installments”.
The majority of commercial loans that lenders extend to customers are all installment loans. As long as there is an existing arrangement between both parties to pay back the amount due regularly in scheduled payments, then what you have on your hands is an installment loan.
Installment loans can either collateralized or uncollateralized. If a customer uses the loan to purchase an asset, it is said to be collateralized.
The perfect example of this is a mortgage loan. In this case, the house in question is the collateral that the loan is purchasing.
Auto loans are another instance of collateralized installment loans. In this case, the loan is being used to buy the collateral which in this case is the vehicle. If a customer defaults on the loan, then the lender has the right to take back ownership of the asset to recover the outstanding amount on the loan.
On the other hand, lenders can also extend loans to customers without requiring a physical asset. The amount lent is based entirely on the creditworthiness of the individual.
They look at the applicant’s history to determine whether or not they have a demonstrated ability to repay the credit amount extended to them. There’s a catch though.
Uncollateralized loans pose a higher risk to lenders than their collateralized counterparts. Therefore, in order to safeguard against the possibility of losing money if the customer defaults on payments, these types of loans come at a much higher interest rate.
What You Need to Know Before Applying for Installment Loans
Before you go ahead and apply for an installment loan there are some factors you need to consider. Here are a few of them:
1. What’s the Money For
The first thing you need to think about before applying for any form of credit is why you need the money in the first place. Is it your first step towards home ownership? Is it for a car?
Do you need the money to grow your business or to take advantage of an existing opportunity? All these need to be clear in your mind (as well as on paper) to make sure that you’ll be able to comfortably service the loan when the installments come calling.
2. Explore All Your Options
Next, you need to go window shopping. That’s how you know that you’re getting the best deal. If you haven’t got a clue where to begin, well don’t fret. Here’s what you need to do.
Find a couple of credible and trustworthy lenders based on reviews from friends or existing customers who’ve taken out installment loans with them. Next, visit each of the lenders and do a side-by-side comparison.
Determine how much is lender is going to give you as well as the repayments terms attached to the loan. It’s important to bear in mind that you don’t need to borrow the entire loan amount you’ve been pre-approved for.
The whole point of the loan is to improve your personal life or business in some way, shape or form. The last thing you want to do is accumulate a mountain of debt that you can’t get out of.
Next, based on your income projections, you need to establish which of the lenders offers a better installment plan that fits right into your lifestyle. Just because you’ll be servicing a loan for a couple of years doesn’t mean you should downgrade your lifestyle to keep up. It should be manageable and flexible.
3. Discuss Worst-Case Scenarios
Uncomfortable as this may be, you’ll need to discuss worst-case scenarios with your potential lenders. In the event that you’re not able to meet your financial obligations, what are the repercussions and are you prepared to deal with them?
What kind of leeway do they give their customers when they don’t pay their installments on time? It’s important to be well aware of all the consequences associated with defaulting on your loan.
Nobody applies for credit with the intention to default, but hey – life happens. There may be unpredictable issues that crop up during the term of your loan. These might be beyond your control.
It’s therefore important to be fully aware of what could happen before appending your signature on the dotted line.
4. Ask for Credentials
Finally, make sure you ask your lender for their credentials. You need to find out whether or not they’re licensed or registered at the state or federal level.
Looking inwards, before you even apply for an installment loan, determine if your credit score is up to par in the first place. A low credit rating might not get you the best terms.
So, you might want to put it off for a bit while you work on improving your credit profile. Check your credit score to know where you stand.
Once you’ve covered all your bases, the process of applying for an installment loan is straightforward. Most lenders will typically require you to fill out an application form.
You’ll need to provide your personal details as well as the purpose of your loan. For instance, you could be looking to purchase a new car.
The lender will then review your application and discuss various options with you. This is with regards to the amount you need to provide as a down payment, the amount and duration of the installments, and the payment schedule.
Your credit score will essentially determine how much you‘ll have to pay as a down payment on the loan. In most cases, having a higher credit rating means that you’ll enjoy a lower amount in down payment and interest rates than someone whose credit rating has taken a hit.
In addition to the interest rates, there are other fees associated with the installment loan application process. For instance, most lenders charge customers a loan application processing fee and a loan origination fee. You also need to be aware of other hidden charges like penalties for late payment.
If you want to save on interest, consider retiring your loan early. However, you should be aware of any prepayment penalties that might be applicable if you pay off your loan earlier than the stipulated period.
Common Types of Installment Loans
Most of the commercial loans in the market today are all some form of an installment loan. Here are a couple of examples.
1. Auto Loans
If you take out a loan to buy a car, you’ll typically pay it off installments lasting an average of 12 to 96 months. If your lender extends to you a longer repayment term, then the amount you’re required to pay in installments will be lower.
However, it also means that you’ll end up paying a lot more in interest rates. It’s always better to take shorter duration installment loans so that you save on the amount you’ll pay in interest.
2. Personal Loans
Personal loans are uncollateralized or “unsecured” since they aren’t backed by any asset. Most people apply for personal loans when they need to take care of unforeseen personal issues that crop up.
You’re probably thinking, “But, I’ve got a credit card. Why would I need to take out a personal loan?” Well, there two solid reasons that will put that notion to bed.
First, the interest rates on personal loans are way lower than those on credit cards. The APR on credit cards ranges between 17.2% and 23.9%. Personal loans, on the other hand, are much lower depending on your credit profile.
This makes them a better alternative. Second, you get to spread your repayment installments over 12 to 96 months. The same can’t be said for credit cards.
Mortgages are installment loans that you take to purchase a home. The interest rates that come attached to mortgages don’t change.
What you pay in monthly-principal and interest installments remain the same year-in year-out for the duration of your loan. Depending on your lender, and your credit rating, the term of the mortgage could be anywhere between 15 to 30 years.
Pros of Installment Loans
Perhaps the most attractive feature of installment loans has to be the predictability of the repayments. With a fixed-interest loan, the fundamental components of your monthly installments remain the same until you completely pay-off your loan.
This makes it easier to budget for your income without worrying about fluctuating rates that might make it hard to live up to your obligation. With that being said, the importance of choosing a loan principal that you can service comfortably cannot be overstated. You should be able to pay your installments even when unexpected financial emergencies pop up.
Installment loans also have the added benefit of giving you peace of mind knowing that your loan will be fully settled by a specific date. Every installment you pay takes you one step closer to financial freedom.
Taking shorter-term loans speeds up this process further and saves you loads of money that you would have otherwise paid in interest. If, on the flip side, your current income doesn’t allow you to pay off your debt within a shorter duration due to the higher installment amounts required there’s an alternative. You can pay off your debt over a longer term but with lower monthly repayments.
Cons of Installment Loans
Installment loans are great and all but they also have their downsides. For instance, suppose you took out a loan worth $20,000. If after a year you realize that you need additional funds, you simply can’t go to your lender to increase the principal amount.
You need to take out an entirely new loan which comes with its own new set of terms. So, you have to know in advance the total amount of money you’ll need for the entire term of your initial loan.
The other drawback has to do with your credit rating. If it’s previously taken a hit in the past, the loan terms that your lender presents to you may not be the most attractive.
You’ll end up paying much higher interest rates than other borrowers who take out the same amount. What’s more, installment loans don’t increase your loan amount even when your credit score improves as is the case with credit cards. The loan amount remains the same once the funds are transferred into your account.
The Bottom Line
Installment loans are like long term relationships. You need to enter with your eyes wide open or you might get burned.
Before you apply for them, make sure you understand all the terms, conditions and the installment loans information that comes attached. The moment you sign on the dotted line, you’re responsible for upholding your end of the deal.
Use the tips in this guide to installment loans to shop around for lenders. Make sure that you get a loan that suits your situation.
Need advice on how to pick the best installment loan lenders around? Reach out to us today and we’ll be happy to point you in the right direction.
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