What Is an Installment Loan?
If you are considering getting a loan, you first need to know how much money you need and what type you are looking to take. That’s where an installment loan comes since, with them, you can find the right fit for you, whether it is a short-term fix or a long-term solution. In this article, we will take a better look at installment loans and how you can get one.
When talking about installment loans, they are short-term loans, where the term usually is up to twelve months. A lot of people use them to borrow the needed money to cover their expenses. Like the name says, with this type of loan, the payments are paid in equal installments over the life of the loan. Also, if you manage to prove that you are struggling financially to repay it back in time, the loan life can be extended.
How Does an Installment Loan Work?
As mentioned above, installment loans or installment lending is a type of loan that people can use to get the needed funding. You can use this type of loan to cover your expenses like rent, bills, or car payments.
Once you take out this type of loan, you will have up to twelve months to repay it back, with the monthly payments being paid back gradually. Another thing to remember is that the interest rate on this loan ranges from 6 to 12 percent, which is higher than the average interest rate on consumer loans.
Types of Installment Loans
Like with any other loan, installment loans come in many different forms and types that allow borrowers to use them for a variety of purposes, like borrowing money to buy a car or to cover costs associated with an unexpected expense.
Here are some types of installment loans:
- Personal loans – This is the most common form of installment loan. They are repaid in a fixed period of time, and they also have a fixed interest rate.
- Auto loans – Another form of installment loan. With this type of loan, you will have to put a down payment or trade-in value of your existing car to get the needed funding.
- Payday loans – This is a short-term loan that is commonly used to get the money quickly, but they do have higher interest rates, and it’s required to repay them back in a couple of weeks. You can get them through direct lenders like check-cashing stores.
- Mortgages – Mortgages are also viewed as a common form of installment loans. The great thing about mortgages is that borrowers are required to repay the money back in a period of 15 to 30 years with a fixed interest rate.
- Student loans – When it comes to student loans, you have two types available to you; private and federal. A lot of people go for federal student lending since there is no credit score needed, and as well interest rates are fixed. In case you are unable to repay it back, you can ask for loan forgiveness
Installment Loans: Pros and Cons
Before applying for an installment loan, you should know that, like any other type of loan, it comes with some pros and cons. We will give you some pros and cons to think about before taking one out.
- Easy to get them
- Can qualify with a bad or no credit score
- Fixed monthly payments
- Possible fees
- High-interest rates
- Missed payments can damage your credit score
Now that we listed some pros, let’s explain them a little bit more. The main benefit of these loans and why a lot of people choose them is because you can get them easily. You can either get them through a traditional lender like a bank or online. Installment loans are also available to borrowers with low credit scores. Since you are paying them in installments, you have fixed monthly payments.
We discussed the benefits but let’s take a look and the drawbacks now. Even though installment loans can be a quick solution to get the needed money, they have much higher interest rates than traditional loans. Since you only have 12 months to repay them back, this can result in you owning more money than you borrowed and ultimately lead you into debt. On top of that, a lot of lenders charge you fees if you repay them back sooner or if you are late with your payment. And the worst setback installment loans have is that if you miss your monthly payments, your credit score can take a huge hit.
Is an Installment Loan a Good Idea?
So far, we have talked about installment loans, how they work, and their pros and cons. A lot of people go for this option since they can get the money fast and easy, but they do have much higher interest rates.
If you are okay with that and if you are positive that you can repay the money back in 12 months or less, then installment loans are the perfect thing for you to get the funding you need fast. On the other hand, it’s crucial to remember that if you lose your job, it will be difficult for you to pay it back, and if you miss your payments, your credit score is going to take a major hit. This can present a problem in the future if you are looking to take a mortgage or any other type of loan.
In other words, we can’t exactly tell you if an installment loan is a good or a bad thing for you. At the end of the day, it all depends on personal needs and as well financial capabilities. Before you decide to take this loan, make sure you do the homework, research different lenders, and consult with a financial advisor.
Alternatives to Installment Loans
Whether you are looking to pay your bills or cover your debt, there are other options besides installment loans. The first option you can consider is payday loans. You can as well get them fast and easy, but the amount you can borrow is smaller, and you will have lower interest rates.
Another alternative to consider is consolidation. This is a great way to lower the existing debt or expense that you have without the possibility of going into another bigger debt.
Our advice is always to consult with an expert to find the best option for yourself and your finances.
Here we broke down more about the installment loans and what they are used for. Like any other type of loan, they come with their own set of pros and cons. That’s why it’s good to weigh both sides before making a decision.
It’s important to remember that just because it suits someone, it doesn’t mean it will be a good option for you as well. There are many different options out there if you need the money fast. So, do your diligence, shop around, compare different lenders and talk to a financial advisor to find the option that suits your needs the best.