Does the idea of seeking out extra money make you feel apprehensive?
Those looking for startup capital for a business or funds to cover an emergency are often concerned about where to turn. Each loan product and loan service comes with pros and cons.
Then there’s the notion of collateral or credit. Should you be looking for a payday loan, an online installment loan, or something else?
It can be frustrating to be turned down or given conflicting offers, especially when looking for ways to clean up credit scores.
We’ll here to help you understand installment loans. We’ll provide enough information so that you can make a thorough and informed decision.
Read on to learn more.
Installment Loan Guide
First, understand that an installment loan is a broad category of several different types of loans. The label separates loans that require a regular schedule of payments to repay. This is opposed to those that require a single or variable payment.
We’ll explain how this definition applies to a variety of types of loans and the benefits and restrictions of each.
Next, we’ll explain the key differences between installment loans and other loan categories. This may seem redundant, but it is important to note the nuances so you can make an informed decision.
Finally, we’ll go over the information used to determine the interests rates and eligibility of loans. Reading this guide will let you answer with authority whether an installment loan is right for your needs.
Types of Loans
Since installment loans normally carry high interest and offer relatively small amounts, they tend to be used by particular demographics. This includes people without access to a lot of equity or without a strong credit history.
Installment loans provide needed capital to accomplish goals and favor the bank or lender over the consumer. However, the lender also assumes a lot of risk in the process.
Let’s look at typical types of installment loans and how they are distributed.
Auto loans provide several different variables which make them unique.
First, an automobile is considered an investment, albeit one that decays in value. The vehicle itself can be sold or repossessed. The amount paid upfront in the form of a down-payment adjusts the interest rate and affects the overall cost of the vehicle.
The vehicle can become its own collateral for gaining further loans once paid off. A vehicle may be repossessed and used as payment against the loan if you fall behind. Otherwise, the loan would default.
Of the types of loans listed here, mortgages are most common variable-rate loans.
The interest rate may change with the federal prime or according to agreements in the loan contract. The value of a house tends to increase, so it is common for interest rates to be higher on shorter loans.
Mortgage loans, along with auto loans, tend to take the form of installment debt. The money loaned isn’t given out and then repaid because the value of the item itself factors into the repayment.
Payments against this kind of loan go through an amortization schedule. The value of the asset, the down-payment, and the interest rate all factor into how much is paid in each installment.
Personal loans often have the highest interest rates and provide the lowest amount of money. This is because these types of loans provide cash to be used for non-guaranteed items or services.
Other loans are often made with a specific entity, such as a car lot or a university’s financial aid department. This gives the lender some assurances the funds are being used. A personal loan also comes with no specific items or objects that can be claimed.
This puts a lot of risk in the hands of the lender. Still, many lenders like to provide a range of loan options.
Personal loans require a stated amount but rarely have specific statements attached. A loan application isn’t filled out to give an amount and “for x.” This component concerns some people.
With all of the legality that goes into the promise of repayment, the average consumer can become concerned. Most of this concern is that they will be sued for fraud or taken to court if the money isn’t used for a stated purpose.
Remember that the lender is concerned with repayment–not the use of the distribution in a personal loan.
Student loans can be created and serviced through a university’s financial aid department for paying tuition. Funds can also be procured for housing and living costs.
The lender normally makes the loan with a deferment in place. Student loans often do not begin accruing interest until after a student graduates or a certain timeframe elapses.
The other type of student loan is the consolidation loan. Consolidation loans work by having one loan provider buy out or cover other loans the student owes. The student can save money by equalizing interest rates and the lender collects that interest.
We provide several offerings in this area.
Other Types of Loans
A payday loan works very differently than a consumer installment loan. Payday loans are the easiest types of loan to get because they are guaranteed against a specific payment at a specific time. This is normally a paycheck (hence the name).
Payday loans are short-term loans. To make them viable, a lender will charge a fee which can be as much as 25% of the loan amount.
A revolving credit loan provides funds now for future payments. The payments will not be set, but often will be a percentage of the amount borrowed. A revolving credit loan may be paid off in full or partially paid and then more can be borrowed.
Credit cards are the most well-known application of revolving credit loan structures.
An installment loan offers a set payment plan (except for the case of mortgages) and a specific amount.
Understanding Basic Terms
The following terms change the amount of a payment and the possible interest rate.
You may have heard the terms “secured” and “non-secured” in some loan documentation. Secured is a term that relates to the loan but stems from collateral. A loan which has a form of collateral is said to be secured or secured against.
This is a loan that has some property which may be collected in lieu of the debt.
Collateralized loans often offer more money at a lower interest rate. This is because the risk for the lender is lessened by the guarantee of something. For a customer looking for a bad credit loan, this type of loan is especially attractive, as the interest rate will be lower than what they can get elsewhere.
These loans have no possible collateral. These usually have higher interest rates and may need some other form of guarantee associated.
Revolving credit loans often are non-collateralized but rely on a strong credit status. Even though a credit history or payment history provides a proof of goodwill or good standing, it is not collateral. Collateral is limited to specific objects held at a value.
A car used as collateral, for example, may secure a loan for an amount. If the car is damaged and the loan defaults, the car will only reimburse up to its value at the time of sale–not the value when the loan was issued.
Eligibility for Loans
Installment loans, like all loans, have to be applied for. The difference in forming eligibility for an installment loan comes down to several factors.
The specifics of the loan amount start with the borrower’s intentions. The lender reviews the criteria for lending the funds. This may take into account collateral, payment history, credit, and down payments. Some lenders offer no credit check loans, that might be attractive for customers who don’t want another hard credit check to affect their credit score.
Fees may be charged to the borrower as well. Application fees and loan fees are the most common. Late payment or penalty fees can come into play if the borrower fails to meet their payment schedule.
The borrower’s previous payment history may greatly affect the interest rate received.
Again, this is related to the risk the lender takes on in approving the loan. A person with a solid payment history can receive more funds with a lower interest rate because the lender has assurances they will be paid back.
The number of payments to be made can also affect the interest rate. This is seen most often in mortgages which have 15 or 30-year plans.
A lender may be asked to provide a proof of income through a bank account. Direct-deposit checks from a job make for better assurance than other means because the lender knows the funds will arrive in a set timeline.
Be careful, though, as most lenders will not accept alternative proofs of income. Self-employed people and those that receive payments through online services will need to be able to show a steady deposit history. Even then, they may be turned down.
Ready to Get Started?
Now you have a better understanding of what installment loans are and how they can be used.
Loans provide assistance and capital to people that need funds now and can make regular payments. This helps the loan provider and you to achieve your goals.
Check out our learning center for more information on loans and credit cards.