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- An installment loan is a certain amount of borrowed money that is repaid over time through fixed monthly payments.
- Mortgages, auto loans, personal loans, and student loans are some common examples of installment loans.
- When you buy an installment loan, you should pay attention to the repayment conditions and any lending fees in addition to the interest.
- Read more about personal finance.
When consumers need to borrow money, they have two main options – a revolving loan or an installment loan. Each type of loan product has its own advantages and disadvantages.
Revolving lines of credit like credit cards can be a great way to pay off smaller amounts of credit that you want to pay back in a short amount of time. But if you want to borrow a large amount of money and want to repay it in fixed amounts over a longer period of time, it goes better with an installment loan.
In this article, we’ll look at the different types of installment loans, how to get them, and when they might be useful for your loan needs. Here’s what you need to know about installment loans.
What is an installment loan?
An installment loan is a certain amount of borrowed money that is repaid over time through fixed monthly payments. Interest is included in the payments and the time to full repayment of the loan (the term) can range from a few months to 30 years.
Some of the loans that consumers are most familiar with are installment loans. Here some examples:
Point-of-sale financing offers and emergency loans without credit checks are also often issued as installment loans.
How to get an installment loan
You can apply for an installment loan at almost any bank or savings bank. You can also check out online lenders like Lightstream, SoFi, Avant, or others.
In some cases, you can take out an installment loan directly from the company from which you are purchasing a product, e.g. B. at your car dealership or furniture store.
Finally, borrowers can take out emergency short term installment loans. Payday loan deals are some of the most notorious places for borrowers to get emergency cash. Payday loans can be incredibly expensive and often require interest rates of 400% or more.
If you are in dire need of cash, you should first apply for an Alternative Payday Loan (PAL) with your local credit union. PALs cap interest rates at 28% and never charge more than $ 20 in fees.
What you should look for in an installment loan
The first thing to consider about an installment loan is the interest rate that is offered to you. Notice whether the rate is fixed or variable. With a floating rate loan, you may be able to get a lower initial interest rate, but it can also increase over time.
If you plan to repay your loan quickly, you can save money with an installment loan with adjustable interest rates. However, if you have to repay for several years, the best way to fix your interest rate is with a fixed rate loan.
Next, review what issuing fees (if any) the lender charges. Often times, the lending fees are a fixed percentage of the loan amount. In the case of short-term loans, however, a flat fee may be charged instead. Look around to find lenders who charge reasonable, or preferably no, fees.
Finally, you should consider the length of the term. In general, the longer the term, the more interest you pay. However, a longer term usually also means lower payments. If you want to save the most money overall, choose a shorter term. But if monthly cash flow is your top priority, a longer term can make sense.
How to save money on an installment loan
The interest rate that you are offered on an installment loan is based in part on your creditworthiness. Hence, improving your credit score before applying for it is one of the best ways to save money on an installment loan.
How Can You Improve Your Credit Score? Paying on time to all of your credit accounts is a good place to start. And lowering your credit utilization rate could give your score a quick boost too. Also, regularly check your credit report for errors. If you find any, you should fix them before applying for an installment loan.
Another way to qualify for better installment loans is by improving your debt-to-income ratio. For example, paying off your credit cards or paying off your car loan before applying for a mortgage can affect the interest rate offered.
After all, one of the easiest ways to save money on an installment loan is to just pay it off faster. While installment loans have fixed monthly payments, most lenders allow you to make additional payments at any time. If you pay off your loan earlier than agreed, you can cut the loan interest for several months or years.
Is an Installment Loan Right for You?
If you like the idea of knowing exactly when your loan will be repaid, an installment loan could be just the thing for you. And since they usually come with predictable monthly payments, installment loans are easier to budget for.
Flexibility, however, is an area where installment loans fall short. Once the money has been paid out, you can no longer take out loans with an installment loan. So, if you don’t know exactly how much money you need, a revolving line of credit might be a better option.