What is an Installment Loan?
An installment loan is any loan that requires payback through periodic payments. The four types of installment loans include auto, mortgage, student, and personal loans. In most cases, you pay your installment loan back with monthly payments until you’ve paid off the loan balance, such as with a car, student, or home loan. However, with some personal loans, you may be required to pay the balance back in different intervals.
Each payment you make toward your installment loan contributes to the interest charged and to the principal amount due. There are different online installment loans available, as well as loans through direct lenders, all of which may offer different terms. It’s important to understand the differences in interest rates, loan amounts, and loan terms since these factors contribute to the monthly payment that’s due and the length of time over which you’ll be required to pay these installments.
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Purpose of an Installment Loan
An installment loan can be helpful if you’re facing an unexpected expense, such as a medical bill or car repair bill. Installment loans are also helpful for building your credit and improving your credit score, as long as you make your monthly payments regularly and on time.
Benefits of a Personal Installment Loan
Not only do installment loans have the ability to help improve your credit score while assisting with unexpected expenses, they also provide additional advantages, including potential flexibility with:
- Loan terms.
- Interest rates.
- Down payment amounts.
- Loan amounts.
Installment loans are also helpful because they can be paid off with convenient monthly payments that make it easy to budget. You may be able to take advantage of low interest rates and if there are no early pay-off penalties, you can pay the loan off quickly to avoid paying some interest.
Risks of an Installment Loan
While installment loans have advantages, there are also risks to taking on this type of debt. If you agree to a loan with a long term and a fixed interest rate, you could find yourself paying interest that’s higher than the current prevailing market rate. If your financial situation changes and you can no longer afford the monthly payments for your installment loan, you also risk defaulting on the loan, which can have a negative impact on your credit score. Defaulting on the loan may cause you to have to forfeit the collateral, which means you would need to give back your car or home.
A payday loan, also referred to as a short-term loan, is a type of installment loan that comes with its own risks. In most cases, these loans are associated with extremely high interest rates and crippling late payment penalty fees. If you default on a payday loan, it can negatively affect your credit, your account can go to a collections agency, and you may be charged high default fees.
How to Get an Installment Loan
To get an installment loan, you’ll first need to identify a reputable lender, either in person or online. The lender will ask for information to ensure you qualify for the loan, including your credit score and history, debt-to-income ratio, and proof of income.
In some cases, you may also be asked to provide collateral. If you’re obtaining a mortgage or car loan, the car or home count as collateral. However, if you’re obtaining a personal secured installment loan, you may be asked to put up your savings account balance or other assets as collateral.
If you qualify, the lender will provide you with information about the installment loan they are willing to offer, including the:
- Expected down payment.
- Maximum loan amount.
- Interest rate.
- Loan term.
- Monthly payment amount.
The lender should also discuss whether there’s an early pay-off penalty and what happens if you default. If you agree with the loan terms, you can sign an agreement for the installment loan, receive the money, and begin your payment schedule.
Online Personal Installment Loan
Online installment loans are usually available through different online financial institutions. Applying for a loan online is quick and easy when compared to a bank. These online systems can efficiently qualify you for a loan and can typically fund the loan within a few business days after you complete the online application.
Many online lenders allow you to opt for a soft credit check during the application process. This allows you to review the loan amount and terms you might qualify for without completing the entire application process and without taking a hard hit on your credit.
Using a Direct Lender
If you’re not currently associated with a bank, you can use a direct lender for an installment loan. With a direct lender, you may be able to qualify for a higher loan amount. Direct lenders also usually offer fast application processes and can provide you with a cash deposit for your personal loan.
Getting a Personal Installment Loan With Bad Credit
If you have bad credit, online installment loans may be easier to qualify for. Generally, these online institutions have more lenient credit score eligibility guidelines. However, keep in mind, if you have bad credit, you may be presented with less-than-ideal loan offers.
With a low credit score, the lender doesn’t have as much confidence that you’ll pay the loan back on time. Therefore, you may be offered a small loan amount, high interest rate, or long loan term, and you may be responsible for a larger down payment or collateral.
It’s important to build your credit score and work to improve your credit report before attempting to obtain an installment loan. With a higher credit score, you’ll have more installment loan options and the terms offered will be more satisfactory and financially beneficial for you.
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This post was updated November 25, 2019. It was originally published November 25, 2019.