Every year, millions of Americans take out installment loans.
If used wisely, installment loans can be valuable tools for building credit and funding large purchases. What’s more, you don’t necessarily need stellar credit to secure an installment loan. Even individuals with bad credit can qualify for these loans.
There is often more than meets the eye when it comes to installment loans, however.
If you’re wondering what are installment loans, read on for some important insight.
What is a Loan?
A personal loan refers to any sum of money an individual “borrows” from a designated lender.
In general, borrowers must repay this lump sum in full over a certain period of time.
Loans are never “free” in this regard, as borrowers must also pay interest on the loan they have borrowed. Interest is calculated at a percentage of the borrowed sum.
Most loans have an APR or Annual Percentage Rate. This is how much borrowers can expect to pay in interest on their loan over the course of a year.
So, if your loan’s APR was 10%, you could expect to pay 10% of that loan sum over a year in interest alone. (This does not mean that you have to pay 10% of that sum each month!)
The amount of interest an individual must pay on a loan depends on many factors. If you secure a loan from a certified lender, that lender may consider your credit score, for example, when determining interest rates.
Your credit score is a number referring to your overall “creditworthiness.” Basically, it gives lenders an idea of how dependable you are as a borrower.
Lenders may also consider your income levels and purpose for the loan. If you are looking for a personal loan no credit check, then the lender will focus more on your income instead of your credit score to determine how much to lend you, and at what interest rate.
There are scores of lenders who offer loans to individuals for various reasons. Some of these lenders are online-based. Others have brick-and-mortar locations.
What Are Installment Loans?
Installment loans refer to a broad range of loans available to consumers. In general, installment loans are any loans that are paid back to lenders in “installments.” This is different from a payday loan online, where you pay back the entire loan in one payment less than a month later.
Typically, these installments are monthly payments that include interest. These payments are generally “fixed,” meaning that they don’t change from month to month (like credit card payments).
Here’s an example.
Let’s say that you borrow a $6,000 loan with a repayment period of four years and an interest rate of 7%. Your fixed monthly payment would be $143.68, and you would end up paying $896.52 in interest over four years.
When you borrow an installment loan, you agree to the borrower’s specific repayment terms. These can be quite broad and will vary from lender to lender.
Interest rates for installment loans are especially variable. These rates can depend on many things, including your credit score.
They can also depend on the amount of money you wish to borrow. Some lenders will adjust rates depending on your repayment term, or how long you need to pay the loan back.
Most people are eligible for installment loans, including people with bad credit. However, you are more likely to secure competitive terms if you have excellent credit history.
Types of Installment Loans
What types of installment loans are available to consumers? Quite a few, actually!
One of the most common types of installment loans is a home mortgage. Mortgages refer to loans individuals request from lenders in order to purchase a home.
Homeowners who finance their home purchase must pay their loan back in fixed monthly payments, including interest (and often homeowners’ insurance).
Houses are expensive, and for that reason, most people pay their mortgages over a long period of time–generally thirty years!
There are several kinds of mortgages available to prospective homeowners. Some of these are fixed rate, meaning that they are subject to the same interest rate the entire time.
Others are adjustable rate, which means interest rates change throughout the mortgage’s lifespan.
Most people opt for fixed-rate mortgages. In fact, most people opt for fixed-rate installment loans in general.
Personal loans refer to money an individual borrows for personal reasons, such as financing a wedding or a home remodel.
These tend to be smaller than a mortgage, often less than $50,000. Most personal loans range between $5,000 and $10,000.
These loans often have shorter repayment periods than mortgages because of their smaller sums.
Some lenders specify what you can spend your personal loan funds on. Others, however, are far more lenient, making personal loans a viable alternative to credit cards.
You may have heard of “payday loans.” These are short-term loans available to individuals in need of some cash between paychecks.
Some people assume that these are a short-term installment loan, but they actually aren’t! This is because most lenders require borrowers to pay back their payday loan sum by their next paycheck.
Unsure about whether to request a payday loan or an installment loan? Read more here.
70% of college graduates graduate with student loan debt.
In fact, student loans give most college students an opportunity to finance their educations.
These are installment loans, meaning that graduates must pay off their debt in fixed payments over the agreed repayment term.
Most lenders enable graduates to start paying their loans after they graduate, or even after an initial grace period. What’s more, because many students don’t have a lot of credit already, plenty of lenders offer competitive interest rates.
Over 107 million people have auto loans. This is a record number given auto financing trends of past years.
For good reason, too. Auto loans give anyone with a driver’s license an opportunity to purchase a vehicle.
As our society gets more car-dependent, this is vital.
Most auto loans are installment loans, enabling borrowers to make fixed monthly payments over the loan’s term. Interest rates vary depending on the lender and value of the car.
Tips for Getting an Installment Loan
Does the idea of an installment loan sound rather attractive? If so, here are some tips for requesting an installment loan.
1. Understand Your Financial Need
What is the extent of your financial need? Are you wishing to finance a large purchase, such as a car, a home, or even a vacation?
Or are you thinking about consolidating your debt? (Debt consolidation often involves taking out one loan to pay off multiple existing loans.)
If you can, put a number to your financial need. Be as realistic as possible when doing so. After all, it is more cost-effective to borrow less money in the long run!
Identifying your motives can also help in the loan qualification process. Some lenders may need a lot of information from you when you request a loan (especially mortgage lenders), and knowing your needs can streamline your application.
2. Know Your Options
Online loans are quite popular and widely available to American consumers. But they aren’t the only option when it comes to personal financing.
You can, for example, make use of a revolving line of credit rather than an installment loan.
Credit cards provide exactly this, enabling users to “borrow” within a certain limit at a given time. Users renew this credit when they pay back borrowed balances.
If you pay your credit card balance religiously, you may not even have to pay interest!
Other options also include payday loans and government subsidies.
Make sure you explore all of your financing alternatives before you start requesting installment loans from select lenders.
3. Research Lenders
The lender really is everything when it comes to installment loans. Your lender can make or break your installment loan experience in many ways.
The best lenders have excellent customer service teams, at the ready to answer any questions you have about your loan. They will also provide fair, competitive rates for eligible borrowers.
What’s more, reputable lenders are transparent about their terms at all stages of the requesting process.
Research potential lenders wisely. Take your time as you do so.
Confer with friends and family members about their experiences with installment loan lenders, if applicable. Be sure to check out some online reviews to back up these referrals.
Identify whether or not you feel comfortable working with an online lender, too. The online lender market is growing, with lots of great lenders to choose from!
4. Request Multiple Quotes
Even if you find one lender you really like, make sure to request quotes from different lenders. This will enable you to compare rates, which are highly likely to vary between lending institutions.
Remember that a low APR doesn’t mean the best deal necessarily. You may have other fees to pay, for example, or a shorter repayment period.
For this reason, scrutinize all terms offered before agreeing to any. Double and triple check these terms!
What are installment loans?
Installment loans refer to loans individuals must repay over a fixed period of time. Generally, these loans have monthly payments that incorporate interest.
There are many types of installment loans available, including mortgages, personal loans, and student loans.
When requesting an installment loan, be sure to compare lenders and understand the extent of your financial need!
Is an installment loan right for you? It very well could be. Read more here! Here are some other articles you might find helpful: