Installment Loans Explained: What Are They Plus Pros & Cons
Installment loans are a type of loan in which the borrower repays the lender in equal installments over an agreed period of time.
Haven’t heard of an installment loan before? Chances are you have but you just didn’t know that’s what it was. For example, mortgage loans, auto loans, and even personal loans are all installment loans!
The repayment schedule is generally set up so that the loan will be paid off by the end of the term. However, some installment loans may have a balloon payment at the end of the term, which means that the borrower will need to make a larger payment to pay off the remaining balance.
What Do You Use Installment Loans For?
Now that you know what installment loans are, it’s time to think about what you might use one for. Installment loans can be used for a variety of purposes, including home improvement projects, car purchases, and debt consolidation.
What’s so great about ‘em? Well, installment loans typically have lower interest rates than credit cards, making them a good option for borrowers who are looking to save money on interest payments.
So, is a payday loan installment or revolving? Nope. Those are different from installment loans because, in general, you pay back a payday loan in one large sum once you get paid.
How Installment Loans Work
An installment loan is a loan that is repaid over time with a set number of scheduled payments. The payments are typically made monthly and the loan must be repaid in full by the end of the term.
Let’s break this down with a real-world example. Let’s say you took out a $1,000 loan with a 10% interest rate and a 12-month repayment term. This means that you would have monthly payments of $86.07.
The total interest paid on the loan would be $103.88, and the borrower would have to pay a total of $1,103.88 to fully repay the loan. And, as mentioned, you would be making those payments in equal installments during the full time of repayment.
There are many different types of installment loans available from lender to lender, so it's important to shop around and compare offers before you decide which one is right for you.
When you're ready to apply for an installment loan, most lenders will require you to fill out an online application and provide basic information about yourself, such as your name, address, and Social Security Number.
Once you've submitted your application, the lender will review your information and make a decision about whether or not to approve your loan. If you're approved, you'll typically receive your money within one to two business days.
Is that all there is to it? Basically, yeah! However, it's important to remember that installment loans are a type of debt, so they should only be used when absolutely necessary. Be sure to only borrow what you can afford to repay, and make sure you make your payments on time each month to avoid late fees and penalties.
Different Types of Installment Loans
There are many different types of installment loans that you can choose from depending on your need. Each type of installment loan has its own specific terms and conditions.
For example, an auto loan will have a different interest rate than a student loan. Different lenders will also offer different terms so it is important to shop around and compare before you decide on a loan.
When choosing an installment loan, it is important to consider the amount of money you need to borrow, the length of time you need to repay the loan, and the interest rate. You should also make sure that you can afford the monthly payments before taking out the loan.
Aside from the basic, mortgage, auto, and student loan options, here are the various different types of installment loans from a financial perspective.
Unsecured Installment Loan
An unsecured installment loan is a type of loan that is not backed by collateral, such as a personal installment loan that you take out from the bank and agree to pay back. This means that if the borrower defaults on the loan, the lender can’t legally take any of the borrower's assets. However, unsecured loans typically have higher interest rates than secured loans because they are considered to be riskier.
Unsecured installment loans are typically used for small purchases, such as appliances or furniture. They can also be used for debt consolidation or to finance a large purchase, such as a car or home improvement project. However, if you’re using an unsecured installment loan for a large purchase then it’s best that you have a good credit score.
Secured Installment Loan
A secured installment loan is a type of loan where the borrower agrees to put up collateral, such as a car or home, in order to secure the loan. This means that if the borrower fails to make their payments, the lender can seize the collateral in order to recoup their losses.
However, secured installment loans often come with lower interest rates than unsecured loans, making them a more affordable option for borrowers. Additionally, borrowers may be able to qualify for a larger loan amount if they are willing to put up collateral.
As a result, secured installment loans can be a helpful tool for those looking to finance a large purchase or consolidate debt. You can find both secured and unsecured loans as part of an online installment loan search, meaning that you don’t necessarily have to go into banks to look for these types of loans these days.
Guaranteed Installment Loan for Bad Credit
Bad credit can make it difficult to get loans from traditional lenders, but there are options available for those with less-than-perfect credit. One option is a guaranteed installment loan for bad credit.
This type of loan is typically backed by a government agency or a nonprofit organization, and it offers fixed interest rates and monthly payments. Because the loan is backed by an entity with a good credit rating, lenders are willing to offer this type of loan to borrowers with bad credit.
Guaranteed installment loans can be used for a variety of purposes, including home improvement projects, medical expenses, and consolidating debt. If you're considering this type of loan, be sure to compare offers from multiple lenders to find the best rate and terms for your needs.
Pros & Cons of Installment Loans
The biggest pro of taking out an installment loan is that they usually have fixed interest rates, meaning your payments will stay the same throughout the life of the loan. This means that a big advantage of an installment loan is that you'll know exactly how much you need to pay each month, making it easier to budget for your payments.
They can also help improve your credit score if you make your payments on time. Additionally, installment loans typically have lower interest rates than other types of loans, such as payday loans or credit cards.
However, there are also some disadvantages to consider before taking out an installment loan. One is that missed or late payments can often lead to higher interest rates. Additionally, if you only make minimum payments, it could take a long time to pay off your loan and you may end up paying more in interest than you originally borrowed.
Ultimately, it’s important to do your research and figure out if an installment loan is right for you before signing on the dotted line.
What to Know About Installment Loans & Credit Scores
Like other types of loans and lines of credit, installment loans can affect your credit score. Namely, installment loans can help improve your credit score. They do this by showing that you're capable of making regular, on-time payments. However, that only works if you make payments on time!
This means that having an installment loan can also hurt your credit score if you make late payments or miss payments altogether. This is because installment loans are reported to the credit bureaus, and late or missed payments will damage your credit score.
Finally, the biggest connection between installment loans and credit scores is that you will need a good credit score to snag the best rate on your loan. If you have bad credit, you’re risking being offered high interest rates and unfavorable terms.
The best way to avoid this is to work towards improving your credit score.
Improve Your Credit Score With Cheese
We’ve worked hard to bring you fee-free financial products in the past and we’re still working behind the scenes to bring you more products that can help make your financial life easier. Stay tuned to learn more about how you can improve your credit score with Cheese.