Buy now, pay later loans are a short-term financing method that allows you to make purchases and pay them in interest-free installments. Payments are made over a fixed period, which is usually a few weeks,
These services are convenient, but can also make it easy for you to overspend, encouraging you to spend more than you can afford. These types of loans also create the illusion that products or purchases are cheaper than they are.
|Interest-free payments||Temptation to spend more than you can afford or earn useless purchases|
|Makes expensive purchases more manageable||Illusion that shopping is cheaper|
|Easy to get approved||Getting into debt easily|
|Does not affect credit rating in most cases||A deposit can be requested at checkout|
Advantages and disadvantages of installment loans
The advantages of installment loans can make them an attractive option, but it is also important to consider the possible disadvantages that come with these loans.
Advantages of installment loans
Installment loans have many advantages. A few include:
- Regular monthly payments: The monthly payments remain the same throughout the duration of the loan, which facilitates the constitution of a family budget and the payment of the invoices continuously.
- Credit score increase: Establishing a payment history with no late payments on an installment loan helps improve your credit score.
- Refinancing opportunities: If interest rates drop or your credit score improves, refinancing into a new loan may be advantageous, as it will likely lower your monthly loan payments or shorten the term of the loan.
Disadvantages of installment loans
If you’re considering taking out an installment loan, be sure to consider some of the downsides:
- Fixed payment: Since installment loans deposit funds in a lump sum, you cannot increase the amount borrowed if you encounter a new financial obstacle or an emergency.
- Potentially long payment schedule: Payment terms for installment loans can be long. It’s important to make sure you’ll be able to make the payments on time each month for the duration of the loan you’re accepting. Conversely, if you want to prepay your loan, be aware of any prepayment fees your lender may charge.
- Can be expensive for bad credit: The interest rate you receive from an installment loan largely depends on your credit score. If you have below average credit, you may be denied a loan or offered a high interest rate that will make monthly payments more expensive.
- Potential charges: If interest rates drop, you can choose to apply for another personal loan at a lower rate. However, you may need to pay other origination fees to process the loan.
Should I take out an installment loan?
When you decide to get an installment loan, you need to weigh the pros and cons. For example, if taking out an installment loan can help you refinance your high-interest debt, taking out this type of loan might be a good idea. Also, if you prefer a fixed monthly payment, this may be a better option than using a credit card or line of credit.
However, if you have bad credit, taking out a loan may not be a good idea unless you apply to a co-signer with good credit to potentially get a lower interest rate. Also, if you prefer to borrow money as needed, an installment loan will not be your best option.
If you decide that taking out an installment loan is the best option for you, make sure you can afford to pay off your debt on time. Failure to repay a loan could significantly affect your credit score and affect your ability to access credit in the future.
Where to get an installment loan
Installment loans can be obtained from a bank, credit union, or online lender, but each has key pros and cons to consider.
Banks are more easily accessible than credit unions because you do not need to be a member to access loan products. However, they tend to have stricter lending criteria.
Plus, you’ll likely get a more competitive rate from a credit union or online lender because they have lower overhead. Online lenders also offer a more streamlined application process, quick approvals, and faster funding times because everything is automated. But you won’t have the luxury of visiting a branch and speaking with a loan officer face-to-face like you would with a bank or credit union.
The good news is that many lenders allow you to apply for a mortgage, car loan or personal loan online. Personal loans are often approved within days, while car loans and mortgages require a more thorough check of your credit history and credit score.
Whatever loan you’re looking for, we recommend checking the rates of a few different lenders before committing. Many online lenders offer pre-qualification, a process where you enter a few details about yourself and desired loan terms in exchange for a quick decision on whether or not you qualify for a loan with that lender. . Prequalification uses a soft credit check, which means your credit rating will not be affected.
Alternatives to installment loans
Installment loans aren’t the only way to access the cash needed to make big purchases or pay off debt. Here are some other options.
Personal lines of credit
A personal line of credit (PLOC) is a generally unsecured revolving line of credit account that has a variable interest rate. These accounts work much like credit cards. You request a specified amount of credit, then access the money as needed. Refunds are based on the amount of money that was used.
Applying for a PLOC does not require providing collateral, such as your home. However, PLOCs are often reserved for consumers with very good credit histories, often those with a credit score of 680 or higher.
Typically offered by community banks and credit unions, credit building loans are for those who don’t have a strong credit score or little to no credit history.
With credit loans, you request a specific amount of money from a lender and make monthly payments on the amount borrowed.
However, in the case of a credit loan, you do not receive the money up front. Instead, the lender deposits the loan amount into a secured savings account controlled by the lender. The consumer makes fixed monthly payments for the loan for a fixed term, and once the total loan balance is paid in full, the lender releases the funds.
The main advantage of a credit building loan is that during the repayment period, the lender will report the payments on time to the credit bureaus. So even though you won’t have access to the money during this time, you will still improve your credit score.
Alternative payday loans
If you are a member of a credit union, you may also consider a payday loan alternative (PAL). These loans are available to people who have been members of a credit union for at least one month, and they generally allow you to borrow between $200 and $1,000 for one to six months.
At the end of the line
Installment loans are a convenient option for consumers looking to cover a large expense, an unexpected financial emergency, consolidate high-interest debt, or buy a car or home. But before applying, it is essential to understand how the different types of installment loans work. It is equally important to shop around with different lenders to find a loan product with favorable terms that suits your financial situation.