If you are in need of money and you’re thinking of getting a loan, there are plenty of options to choose from. However, if your credit score is poor, your options become much more limited. Having bad credit score does not mean you are out of options since there are few types of loan where your credit score won’t be much of an issue. One of them is installment loans. Below, we’ll take a look at what installment loans are and how they work.
What is an installment loan?
An installment loan is a type of loan which the amount of money you have taken out is repaid in scheduled payments (installments) over an agreed period of time (normally one payment per month) and that payment includes principal and interest.
With installment loans, you can repay the loan over a longer period of time compared to payday loans which are obligatory to pay back by your next paycheck. What determines the amount of each scheduled payment are the amount of the loan, its length and its interest rate. Although installments loans in most cases are repaid with fixed regular installments, the borrower can actually repay their loans earlier than agreed which will eventually save them money on interest and fees.
Installment loans include both personal and commercial types of loans. Mortgages, personal and auto loans are probably the most common installment loans. Unlike most types of installment loans, mortgage loans have variable rates, meaning that the interest rate changes during the life of the loan. With most installment loans, the scheduled monthly payment stays the same throughout the whole period of the loan. That makes it easier for borrowers to calculate their budgets in advance and be able to easily make their payments every month.
How does it work?
To apply for an installment loan, the borrower must submit an application with a lending company. He usually has to specify the reason why he needs the loan. The loan lender will discuss the loan specifics with the borrower, including the loan amount, term and structure of payments. The loan term can vary from five months to five years or longer. The repayment method is usually by deducting the monthly installment directly from your bank account on the due date of the scheduled payment. Some lending companies let you pay via check or online through an app.
Who is eligible for an installment loan?
Although you can still apply for an installment loan even with bad credit rating, there are some requirements you have to meet in order to be approved for one:
- You don’t need to be employed to get an installment loan, but you must have a steady source of income that allows you to make your monthly payments comfortably
- You must be 18 years old or older to be eligible for installment loan
- You must not be in bankruptcy or close to filing for one
- You must be a resident of the state which you choose to apply for your installment loan
How much will an installment loan actually cost?
That depends very much on your financial situation and the loan you have been approved for. After you applied for an installment loan, you should receive a contract outlining the loan’s interest rate and fees. Some expenses that may apply are:
- Interest rate. This is the interest rate for borrowing the money and it is expressed as a percentage.
- Fees. You may be charged with late payment and prepayment fees plus loan origination fee.
- APR. The annual percentage rate includes all interest and fees expressed as a yearly percentage
Advantages and disadvantages of installment loans
Installment loans can be really flexible with the terms of the loan amount and length of the loan. This allows them to be a great solution for many borrowers. With installment loans, borrowers can get the loan they need at a much smaller interest rate compared to some other types of loans. This lets the borrowers have more cash in their pockets instead of having to pay high interest with it.
On the other hand, in the case of a longer-term loan, fixed-interest loan payments that the borrower is making may be at a higher interest rate than what other loans on market have to offer. Another disadvantage of installment loans is that the borrower can find himself hooked onto a long-term financial obligation. As the financial situation of the borrower change at some point, he may not be able to repay his monthly installments as easily as he used to. This means that any collateral used for the loan may be at risk.
Choosing a lender
If you are thinking of taking out an installment loan, choosing the right installment loan lending company is essential. Borrowers should do thorough research before choosing a lender and should choose one that complies with all state laws. It should also provide full disclosure of information regarding rates and its lending practices.