What is an installment loan? Definition and examples

An installment loan is a type of loan that allows individuals to borrow money and repay it in installments over time. The amount borrowed is often a large sum. Installment loans are often used to purchase items that consumers cannot afford to pay in cash.

What is an installment loan?

An installment loan will specify an interest rate, the required payment schedule as well as the penalties for missed payments. Installment loans can allow prepayments, although there may be prepayment penalties in some cases.

Some installment loans may require collateral, such as a mortgage and a car loan. The home purchased and the vehicle for which the loan is taken are the collateral in these examples. There are also unsecured installment loans such as personal loans which can be used for various purposes.

How to qualify for an installment loan?

As with any type of loan, the borrower will consider a number of factors to assess your application for an installment loan.

  • Your credit rating. As with any type of loan, the better your credit rating, the more likely you are to be approved. A FICO score of 700 is generally considered good, a score of 800 or higher is generally considered excellent. A higher credit score will also help you receive a lower interest rate.
  • Your credit history. This includes factors such as your history of paying your debts on time and any judgments, bankruptcy, or other public defaults recorded.
  • Your debt-to-income ratio (DTI). This is the total of all your monthly obligations and debt payments compared to your monthly income. Those with lower DTI ratios are perceived as better credit risk by lenders.
  • Income verification. Lenders will want to know that you have a stable and reliable source of income that will allow you to make all payments in full and on time.
  • For some installment loans, collateral may be required to provide collateral to the lender. In the case of a loan against an asset like an automobile or a house, that asset will serve as collateral for the loan. In other cases, you may need to provide additional guarantees. This can include money set aside or a lien on other assets you may own.

What are the advantages of an installment loan?

One of the main advantages of an installment loan is the predictability of payments. Most installment loans have a fixed monthly payment over a fixed period. This makes budgeting easier and can help with your overall financial planning.

The fixed term provides the convenience of knowing that if you make all the payments in full and on time, the loan will be repaid in full by a specific date.

Paying off an installment loan can help build your credit history and can show creditors that you are a good credit risk in that you pay your debts on time.

An installment loan can help you afford to make large purchases without having to draw on cash reserves earmarked for other purposes. This is an advantage as long as you don’t exhaust yourself taking out the loan.

Where can you get an installment loan?

There are many places to get an installment loan. A few include:

  • Banks are a primary source for various types of installment loans, including auto loans, mortgages, and personal loans. Although banks are accepting new customers all the time, it can be helpful to be a current customer. If you anticipate having future borrowing needs, it may be a good idea to build a relationship with a bank early on, starting with a checking account and a savings account.
  • Credit unions serve members based on the organization they work for, affiliation such as the military, geographic region or otherwise. Credit unions often have lower rates and better terms on installment loans than banks for borrowers with medium or poor credit.
  • Online lenders are becoming more and more common. Whether it’s online banks, credit unions, or one of the many lenders that do business exclusively online, this avenue offers another alternative for many borrowers. Online lenders are available for all types of installment loans and cater to lenders with a variety of financial situations and borrowing needs. The application process is also often quick and streamlined.

Examples of installment loans

Mortgage

A fixed rate home loan is a classic example of an installment loan. The term of the loan is fixed; Terms of 30 or 15 years are common. The payment of principal and interest is also fixed, although your overall payment may vary depending on how your local property taxes change if those payments are blocked and paid by your mortgage lender.

The property serves as collateral for the loan and can be foreclosed by the lender if you do not repay the loan.

At the end of the loan term, assuming you have made all required payments, the loan is paid off in full and you own your home with complete freedom. Mortgages generally allow additional payments of the principal, which allows the borrower to pay off the loan sooner. If the property is sold before the mortgage is repaid, the loan will have to be paid from the sale proceeds or other assets of the seller if the remaining mortgage amount cannot be covered by the proceeds of the sale. the sale.

Automatic loan

A car loan is a fixed-term installment loan. Loan terms of three or four years are common, but longer-term loans are increasingly available to allow borrowers to finance more expensive vehicle models.

Auto loans are available from banks, credit unions, and various online lenders. In addition, dealers generally have relationships with lenders, including their own captive lenders in some cases. It’s a good idea to research the best price and deal before buying a car to make sure you get the best deal.

The vehicle serves as collateral for the lender; the vehicle can be repossessed if you do not make the payments on the loan.

Personal loans

Personal loans can be used for a variety of purposes including consolidating other high cost debts or unexpected expenses such as medical bills. The term of the loan can vary, generally the range is 12 months to 96 months or more.

Personal loans are generally unsecured, so interest rates are usually a bit higher than other types of installment loans. There are a variety of lenders who offer this type of loan, so shop around before making your decision.

Installment loans can provide a fixed rate solution for your borrowing needs, including a large purchase or debt consolidation.

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