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Learn how installment loans work

Learn how installment loans work
Learn how installment loans work

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?

What is an installment loan?
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?

Who is eligible for an installment loan?
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

Advantages & disadvantages of installment loans
Advantages & 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.

 

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How to choose an installment loan

How to choose an installment loan
How to choose an installment loan

Even though there a lot of people who probably don’t even know the definition of an installment loan, there’s a pretty good chance they would need to take out one some day.

What is an installment loan?

What is an installment loan?
What is an installment loan?

An installment loan is a type of loan in which you pay back the amount you’ve taken out in a set number of scheduled payments over a certain period of time. A lot of different types of loans fall into the category of installment loans, that includes mortgages and auto loans. Even though credit card requires a monthly minimum payment, it is not an installment loan.

As we already said, installment loans require a number of regular payments over a certain period of time. Compared to payday loans, installment loans normally last longer (they could last several years) with each payment evenly spread over the whole period of the loan with interest included.

No doubt, taking out an installment loan can be quite beneficial, especially if it is for big purchases and also for any other situations where you are in need of cash. Installment loan lending companies not only provide borrowers with much lower interest rates on their loans compared to other types of loans, their clients also build credit if their credit history is poor or if they don’t have a credit history at all.

If you are considering an installment loan, the first thing you should probably do is get information about every type of installment loans to find the one that is best suited for your situation. After that, you should find a reliable installment loan lending company to work with. We are going to share some insights on how to choose an installment loan that works for you.

Different types of installment loans

Before you decide to take out an installment loan you must know the different types you can choose from:

  • Unsecured Installment Loans

Student Loans
Student Loans

Normally, unsecured installment loans are loans for a small sum with high interest rates. They are some of the most popular types of loans you can find. With unsecured installment loans, you get your money from the lender and you have to pay it back over an agreed period of time. Going for this type of loan makes the most sense when you need money only for a short time period – 4-5 years or less. It is also worth mentioning that if your payments are on time, it can really help you with rebuilding your credit.

  • Student Loans

Student loans are a type of installment loan where you get a set amount of money for your educational expenses. Once you are out of college, you have to pay back the loan by paying a set amount of money each month. Student loans also give you the option to defer your payments for a period of time when you are unemployed but once you’re employed again, you will have to pick up the repayments again.

  • Mortgage Loans

When taking out a mortgage loan, what you are able to do is to finance your house and pay back the loan over a set number of years. It is of great importance that you do your repayments on time or you will be at risk of losing your home and badly damaging your credit.

  • Car Loans

Car Loans
Car Loans

If your car has broken down or you just want to buy a new one but you don’t have the cash, probably a car installment loan is the answer for you. Keep in mind though that much like mortgage loans, if you are not able to pay the money back on time, you risk your car being taken back.

Choosing the right lender

Once you’ve decided what type of installment loan you want to take out, it’s time to choose a reliable lender who is best able to meet your needs and apply for your loan. To do so, here are a few steps you could take:

  • Make a good financial portfolio

Make a good financial portfolio
Make a good financial portfolio

The application process itself does not create as much stress as the documents you have to prepare in order to ensure your application for the installment loan will be approved. What you need to do first is to collect all the data (your credit records and financial status). Perhaps your liabilities and assets are what your potential lending company may be interested in, so you must not forget to take them along with you.

Even though traditional banks are way more strict when it comes to your documents, installment loan lenders also require some paperwork, so you should keep that in mind.

  • Think the whole thing through

You shouldn’t apply for an installment loan if you are not completely sure that you need one. If you decide to apply for one, you should ask yourself whether you can afford to repay it. Your ability to pay back the installment loan should be your main concern.

  • Few things you may want to do before you proceed with your loan:

  • Ask which are the types of installment loans you qualify for
  • See if there are any hidden fees or charges you’ll have to pay apart from the interest rate

Doing those things will help you find an honest and reliable lender.

Apply for your loan

Once you’ve decided which type of loan you want and you have found the right lender, there’s only one thing left to do – submit your application and get the cash you need.