You have seen your dream home or auto you want to purchase. But you are short of cash to go about this purchase. Installment loans can help you achieve that dream of owning your dream house or car.
Before deciding to take up any installment debt, you should first understand the following.
- What are installment loans?
- How do they work?
- What are the different types of installment loans?
- Can installment debt affect your credit?
- What are the requirements?
- Things to consider before applying.
- Tips on how to get installment loans.
- Where you can apply for these loans.
What are installment loans?
Installment loans are loans that are repaid over time with a certain number of scheduled payments. Typically there are at least two installments on this type of loan. The term of these loans can be a few months or up to 30 years.
If you borrow a certain amount of money and agree to repay in a series of payments, that’s installment loans. Installments loans are generally safer and more affordable than other loans like payday➔ and title loans ➔. The amount you pay in installments depends on the principal loan amount, interest rate, and loan duration.
For a better understanding, let’s see how this loan type works.
How do installment loans work?
To fully understand how installment loans work, let’s use a simple example. Let’s say you borrow $3000 at an interest rate of 15%, and you have 24 months to repay the loan. So by the end of the 24 months, you should have paid the total of $3450. That is; Principal Loan amount ($3000) + 15% Interest Rate ($450).
To know the monthly payments you have to make to repay this loan in 24 months, divide the total amount by the loan duration. That means you divide $3450 by 24 months which is $143.75. So you will be paying $143.75 every month for 24 months. Although some lenders have application fees, you don’t have to pay any processing or application fees with other lenders.
Types of Installment Loans
There are different types of installment loans you could get from lenders. The four most common ones are; home or mortgage loans, auto loans, personal loans, and student loans. Now let’s briefly explore each of these types of installment debt. Note: If you want to understand each one thoroughly, I have included a link to another article covering the specific loan type.
Home or Mortgage Loans:
A home or mortgage loan is when you borrow money from a bank or lender to finance the purchase of your home. Depending on the loan terms, you have to repay the loan with interest over 15 to 30 years. The interest rate on mortgage loans is around 3% APR on average.
Home loans are secured loans since you could lose your home to the bank or lender if you default for several months. So make sure you have a good payment plan to avoid losing your property. To know more, check out this guide on how home loans or mortgages work ➔.
Auto Loans:
Auto loans are another example of secured installment loans. You can borrow money from a lender or a bank to finance the purchase of a vehicle of your choice. The loan term is usually between two to six years.
You will have to pay the total cost of the car you bought plus the interest rate. But if you miss your monthly payments multiple times in a row, the lender can seize your vehicle. The lender will then sell your car to recover the loan amount. Learn more about auto loans.
Personal Loans:
A personal loan is either a secured or unsecured loan you borrow from a lender with a fixed interest rate over a specific period. The amount of this loan type is typically between $1000 to $100,000. Depending on how you can handle the repayment, you will have to repay this loan in two to seven years.
Although most lenders love to give out secured personal loans, they can always offer you unsecured loans. But some variables determine how much you qualify for and what interest rate you get. These variables are; your monthly income and credit history. Follow this link to know how to apply for personal loans ➔.
Student Loans:
Student loans are money you borrow to help pay for your studies with the agreement of paying back in the future. The repayment of this type of loan includes the principal amount of the loan plus interest. There are two main types of student loans you could get: private or from the state.
Federal or state loans have a low interest rate since the government is trying to help students get a degree. On the other hand, private student loans have a higher interest rate compared to federal student loans.
Can installment loans affect your credit?
Although installment loans can help build your credit history, it is generally unwise to borrow just to improve your credit score. But there are specific loans you can take that will help improve your credit score. These loans are from lenders that have credit-builder loans.
Installment loans can help you improve your credit score if you repay on time. But if you miss out on your monthly payment for more than 30 days, you could lose between 50 to 100 points. You can also use credit cards to build up your credit score since they can help you to diversify your credit history. Remember only to take a loan if you have a project you want to sponsor or a business idea you want to execute.
Requirements to get installment loans:
Although the requirements to get an installment loan vary from lender to lender, below are some basic ones.
- 18 years or older.
- Steady source of income.
- You are a legal resident or citizen.
- Have a government-issued ID.
- Have a checking account.
Apart from student loans, you can quickly get an installment loan if you have a good income source. It even makes it better if you have collateral since the interest rate will be much lower.
5 Things to Consider before applying for installment loans:
Before getting any form of installment loan, there are few things you have to consider. Make sure to clarify these things to avoid putting yourself in a difficult situation. Let’s take a look at these things you must consider.
1. Offered Interest rates: Make sure you are aware and comfortable with the lender’s interest rate. Don’t accept any loan with a higher interest rate.
2. Frequency of Payments: Although the repayment schedule is every month, you should double-check with the lender. Read the fine print on the contract, and don’t hesitate to ask many questions before accepting the loan.
3. Access To Loan: Is it easier to apply for this loan? How soon can you get the approved loan in your bank account? These are questions you must ask yourself before applying for an installment loan. Most lenders have an online application process. They can quickly approve your application and grant you access to the amount you requested.
4. Penalties: You might be sure of on-time repayment, but there are always unforeseen situations your could encounter. So, you should the penalties involve should you default on the monthly repayment. Again, please read the fine print on the loan agreement before you sign it.
5. Restrictions: Depending on the type of installment loan you want, there might be some restrictions. Check the lender’s requirements before applying for this loan. Don’t waste your time filling out the application form if you don’t meet all requirements.
Tips on how to get installment loans
To increase your chances of getting an installment loan, you could do the following:
- Boost your loan application: You can secure an unsecured installment loan with collateral. This way, you increase your chances of being approved. In addition, you could get a lower interest rate and higher loan amount.
- Compare different options: There are various methods lenders use in assessing your loan application. These lenders also have different interest rates. So comparing lenders will allow you to get a better deal.
- Pre-qualify: Most online installment loan lenders have a pre-qualification form on their website. You need to fill out the online application form by providing some basic information about yourself. Due to this pre-qualification process, you will receive tailored offers that fit your portfolio.
- Apply online: Although you can go to your bank or a lender’s physical location and apply for a loan, doing this online is a better option. With online lenders, your loan approval could be faster and guaranteed.
Bottom Line
If you want to finance a major purchase but are short of cash, installment loans can help you achieve that. With installment loans, you can finance your dream home, car, boat, trailer, or motorcycle. Remember to only go for an amount that you can afford to repay with interest inclusive. Never take an installment loan to finance an event like Christmas because it is not worth the stress.
If you decide you need an installment loan, we have researched some good options you can consider.
