Installment loans – loans that allow you to borrow money and pay it back in equal monthly installments with a fixed interest rate – are a handy personal finance tool if you’re looking to pay off large debts in small amounts. manageable pieces.
The most common type of installment loan is a personal loan, but other examples of installment loans include non-credit check loans, mortgages, and auto loans.
What is an installment loan?
Installment loans allow individuals to borrow a predetermined amount of money, paid out as a lump sum, which can be repaid over time. Typically, these loans come with a fixed interest rate and require regular monthly payments that stay the same every month. A portion of each monthly payment is applied to the principal amount borrowed, and a portion is applied to the interest on the loan.
Installment loans are different from credit cards or lines of credit, which typically have more flexible repayment terms and variable interest rates, meaning you don’t have a predictable monthly payment. With installment loans, you always know what to expect when your monthly bill is due.
Types of installment loans
Installment loans come in many forms. While they work the same, each type has different characteristics, loan goals, and average interest rates.
A personal loan is money provided by a lender that can be repaid in monthly installments over a specified period at a fixed interest rate. These loans are available from online lenders, private lenders, and credit unions.
The proceeds of a personal loan are provided in a lump sum and can be used to finance a variety of needs.
“A personal loan can be a great financing option for consumers looking to budget for a wide range of expenses, from auto repairs to home renovations,” says Mark Victoria, unsecured loan manager for TD Bank. “A very common and effective use of a personal loan is to consolidate higher interest credit card debt. “
The repayment terms for personal loans typically range from 24 to 60 months, but some can be as long as 72 months.
Loans Without Credit Check
Loans without credit check are often provided by payday lenders who do not check your credit score before lending money. Payday loans are meant to help consumers in times of emergency or when they have no other source of credit.
Payday loans are often short term, high cost loans. When applying for these loans, your credit score does not matter because your paycheck is used as collateral against the amount borrowed.
When you are approved for a payday loan, you give the lender a post-dated check for the amount borrowed plus fees. The lender keeps this check and gives you cash. On your next payday, the lender cashes the check you provided.
If you take out a loan online, you give the company permission to withdraw the funds from your bank account on your next payday after you’ve been paid by your employer.
The personal loan amount is less than that of a personal loan, often limited to around $ 500, but in some cases the limits are higher.
Another common installment loan is a mortgage. The most popular mortgages require homeowners to repay the borrowed money over 15 or 30 years with a fixed interest rate. Because a mortgage is backed by collateral, like a house or condo, interest rates tend to be lower.
Auto loans are another popular type of installment loan. Typically, consumers put down a down payment on a car or apply the trade-in value of their existing car and then finance the balance of the purchase price with a car loan. Monthly payments are made to lenders until the car loan is paid off in full.
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.
Benefits 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 establishment of the household budget and the payment of bills over time.
- Increase in credit rating: Establishing a past due payment history on an installment loan helps improve your credit score.
- Refinancing opportunities: If interest rates drop or your credit rating improves, refinancing into a new loan can be beneficial because it will likely reduce your monthly loan payments or shorten the term of the loan.
Disadvantages of installment loans
If you are 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 hurdle or emergency.
- Potentially long payment schedule: Installment loan payment times can be long. It is important to make sure that you will be able to make the payments on time each month for the duration of the loan you are accepting. Conversely, if you want to prepay your loan, be aware of the prepayment fees that your lender may charge.
- Can be expensive for bad credit: The interest rate you receive from an installment loan depends largely on your credit score. If you have below average credit, you may be turned down for a loan or offered a high interest rate that will make your monthly payments more expensive.
- Potential costs: If the interest rates drop, you can opt for another personal loan at a lower rate. However, you may need to pay other origination fees to process the loan.
Do you have to take out an installment loan?
When deciding whether 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 might not be a good idea, unless you are applying 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 may not be your best option.
If you decide that an installment loan is the best option for you, make sure you can afford to pay off your debt on time. If you default on a loan, it could significantly damage 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. As you shop, you’ll benefit from the lowest fees and interest rates.
Many lenders allow you to apply for a mortgage, car loan, or personal loan online. Personal loans are often approved within days, while auto loans and mortgages require a more in-depth check of your credit history and credit rating.
“As with all loans, the lender decides if you qualify based on your income, credit history and credit experience,” says Todd Nelson, senior vice president at LightStream.
Whatever type of loan you are looking for, we recommend that you check the rates of different lenders before committing. Many online lenders offer prequalification, a process where you enter a few details about yourself and your desired loan terms in exchange for a quick decision on whether or not you are eligible for a loan from that lender. Prequalification uses a flexible credit check, which means your credit score will not be affected.
Alternatives to installment loans
Installment loans are not the only way to access the cash needed to make large purchases or to 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 a credit card. You request a specified amount of credit and then access the money as needed. Refunds are based on the amount of money that has been used.
Applying for a PLOC usually does not require providing a guarantee, like your home. However, PLOCs are often reserved for consumers with a very good credit history, often those with a credit score of 680 or higher.
Usually offered by community banks and credit unions, credit loans are aimed at those who do not have a good credit rating or who have little or no credit history.
With home builder loans, you request a specific amount of money from a lender and make monthly payments on the borrowed amount.
However, in the case of a credit builder loan, you do not get the money up front. Instead, the lender deposits the loan amount into a secure 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 home equity loan is that during the repayment period, the lender will report the payments on time to the credit bureaus. So even if you won’t have access to cash 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 want to consider an Alternative Payday Loan (ALP). These loans are available to people who have been in a credit union for at least one month, and typically allow you to borrow between $ 200 and $ 1,000 for one to six months.