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- An installment loan is a specific amount of borrowed money that is paid back in fixed monthly payments over time.
- Mortgages, auto loans, personal loans, and student loans are some common examples of installment loans.
- When shopping for an installment loan, you should pay attention to the repayment terms and possible origination costs in addition to the interest rate.
- Learn more about personal finance coverage.
When consumers need to borrow money, they have two main options: revolving credit or an installment loan. Each type of loan product has its own set of advantages and disadvantages.
Revolving lines of credit, like credit cards, can be a good way to pay off smaller loans that you plan to pay off in a short period of time. But if you want to borrow a large amount of money and want to pay it back in fixed amounts over a longer period, an installment loan will be more suitable.
In this article, we’ll look at the different types of installment loans, how to get them, and when they might be right for your borrowing needs. Here’s what you need to know about installment loans.
What is an installment loan?
An installment loan is a specific amount of borrowed money that is paid back in fixed monthly payments over time. Interest is included in the payments and the time it takes to fully repay the loan (the term) can range from a few months to 30 years.
Many of the loans that consumers are most familiar with are installment loans. Here are some examples:
Point-of-sale financing offers and “no credit check” emergency loans are often also set up as installment loans.
How to get an installment loan
You can apply for an installment loan from any bank or credit union. You can also consult online lenders like Lightstream, SoFi, Avant or others.
In some cases, you may be able to take out an installment loan directly from the company from which you are purchasing a product, such as your car dealership or furniture store.
Finally, borrowers can take out short-term emergency installment loans. Payday loan stores are among the most well-known places for borrowers to get emergency cash. Payday loans can be incredibly expensive and often charge interest rates of 400% or more.
If you need the money urgently, consider applying for an Alternative Payday Loan (ALP) from your local credit union first. PALs cap interest rates at 28% and never charge more than $ 20 in fees.
What to look for in an installment loan
The first thing you will want to consider with an installment loan is the interest rate that is offered to you. Make sure to check if the rate is fixed or variable. You may be able to get a lower initial rate with an adjustable rate loan, but that rate could also increase over time.
If you plan to pay off your loan quickly, an adjustable rate installment loan could save you money. But if you have to repay for several years, locking in your interest rate with a fixed rate loan may be the best solution.
Next, check the setup fee (if any) charged by the lender. Often, the origination fee is a fixed percentage of the loan amount. But short term loans may charge a fixed fee instead. Shop around to try and find lenders who charge reasonable fees, or preferably none.
Finally, you will want to consider the length of the tenure. In general, the longer the term, the more interest you will pay. But a longer term usually also means lower payments. If you are looking to save the most money overall, try choosing a shorter term. But if monthly cash flow is your top priority, a longer term might make sense.
How to save money on an installment loan
The interest rate offered to you on an installment loan will be based, in part, on your credit score. So improving your credit score before you apply is one of the best ways to save money on an installment loan.
How Can You Improve Your Credit Score? Making payments on time on all of your credit accounts is a good start. And lowering your credit usage rate could also boost your score. Also, periodically check your credit report for errors. If you find any, be sure to correct them before you apply for an installment loan.
Another potential way to get better rates on installment loans is to improve your debt-to-income ratio. For example, paying off your credit cards or paying off your car loan before you apply for a mortgage could make a difference in the rate you are offered.
Finally, one of the easiest ways to save money on an installment loan is to pay it off faster. Although installment loans have fixed monthly payments, most lenders will allow you to pay extra whenever you want. By paying off your loan sooner than expected, you could reduce several months or years of interest on the loan.
Is an installment loan right for you?
If you like the idea of being able to know exactly when your loan will be paid off, an installment loan could be a great option. And because they usually come with predictable monthly payments, installment loans can be easier to budget for.
However, flexibility is an area where installment loans are insufficient. Once the funds are disbursed, you can no longer borrow on an installment loan. So if you’re not sure exactly how much money you’ll need, a revolving line of credit may be a better option.