Everything You Need to Know About Installment Loans
Posted by : Premraj | Posted on : Wednesday, August 7, 2019
DELICIOUS
SU
REDDITYou may not be familiar with the term “installment loan”, but chances are, you currently have several. Installment loans are typically what we use to pay for our cars and mortgages for example. Installment loans allow you to borrow a sum of money and pay it back over a period of time.
With fixed monthly payments over a set amount of time, installment loans make it easier to budget and allow you to borrow larger sums of money for those big life purchases.
Read on to learn more about how installment loans work, the common monthly installment loans, and the various types of loans out there.
What Are Installment Loans?
An installment loan is one of the most commonly used loans. Installment loans can be anything from your mortgage to your auto loan. You can have an installment loan through a traditional bank or they can be online loans with monthly payments.
Installment loans are loans you take out for a set amount of money all at once. You then repay this loan over a set amount of time using fixed monthly payments. These payments are called installments. Some installment loans have variable interest rates, and these payments will fluctuate based on this.
Unlike revolving credit such as a credit card, you know exactly how much you are borrowing with an installment loan. Payments to repay this loan are usually paid monthly. This can vary depending on the schedule you and the lender agree upon.
Once you make all of the agreed-upon installment payments, your loan is typically considered paid off and closed. There may be cases where a home or car is sold before the installment payments are completed, however. In these cases, you will pay off the loan in full with the sale of your property.
Examples of Installment Loans
There are several different types of installment loans out there. Student loans, auto loans, mortgages, and personal loans are all common types of installment loans. Chances are you currently have one or more of these types of loans.
Here’s a little more insight into a few of the most common forms of installment loans.
1) Personal Loans
A personal loan can be used for a variety of purposes. You may be paying off a sudden expense such as a medical bill or you may be consolidating other debt. Personal loans usually have higher interest rates and are taken out over a relatively short amount of time. Typically you’ll have a loan term between 12 and 96 months with a personal loan.
Personal loans can have higher interest rates because they don’t require collateral such as your home or your car.
2) Auto Loans
Auto loans are loans you take out to purchase a car. Typically you’ll have installment payments for 12-36 months. The longer you spread out your payments, the lower your payments will be. You’ll also usually have higher interest rates, however.
Even though you may opt for a longer installment period when you combine that with the higher interest rate, you’ll likely end up paying more for your car in the long run.
3) Mortgages
Mortgages are an installment loan you take out to purchase a home. Mortgages have longer installment periods than some of the other types of installment loans. You’ll typically have a repayment period of anywhere from 15 to 30 years.
Many mortgage payments have fixed interest rates. This means that your interest rates and payments will stay the same. Typically, when you sell your home, you’ll take the profits from your home sale and pay off your mortgage.
Benefits of Using Installment Loans
There are several benefits to using installment loans. For one, your monthly payments will typically stay the same. Each month, if your payment has a fixed interest rate, you’ll know exactly how much your payment will be.
A schedule and payment that is predictable is a nice perk. This can help you budget and plan the rest of your expenses. It can help you avoid missing payments and stay on track financially. Knowing where your money is going and when will help you stay within your budget as well.
Installment loans also make it possible for you to make big purchases. If you couldn’t take out a mortgage or auto loan, for example, it could be very difficult to purchase a home or buy a car. Installment loans allow you to borrow the funds necessary to do this without having to pay large sums of cash.
Paying installment loans on time will also help boost your credit score and keep your credit in good standing. The more credit history you have paying your installment loans on time, the better your score will typically be.
The Negative Side of Installment Loans
Installment loans can also have negatives. If you have trouble making payments, for example, missing your installment loan payments can really affect your credit. You’ll be subject to higher interest rates and a lower credit score the more payments you miss.
Another drawback to using installment loans is the interest you pay. Paying the principal plus the interest means you’re paying more than the sticker price for the item or home.
You are able to obtain a free annual credit report each year from the U.S. government. It’s always a good idea to get this so you can stay on top of your score and credit history.
Getting Approved for an Installment Loan
The approval process for installment loans will vary by the lender. Typically, a lender will run your credit and verify your employment. The better your credit, the better chances you have of receiving low-interest installment loans.
You’ll need to show you have proof of employment in order to show you can keep up with the payments as well. In addition to your income, lenders will look at your credit score. It’s always a good idea to know where you stand financially with your credit and budget before applying for an installment loan.
