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What Is An Installment Loan?
This is a fixed amount of money you borrow, then repay it in equal amounts at regular intervals. Installment loans have a longer repayment term. The installments are paid on a monthly basis.
There are many types of installment loans available. While some installment loans are restricted to a specific purpose, others can be used for any purpose.
- Auto loans
- Credit-builder loans
- Home equity loans
Credit cards and line credit, on the other hand, are not installment loans. These are types of revolving credits, as neither the monthly payment nor the amount borrowed is fixed.
Keep in mind that every type of installment loan has its fees, interest rates, and other features. Below are details about each type and how they work.
How do Installment Loans work?
Installment loans are a way to borrow money in a lump sum. This can be done by transferring funds from a bank account or writing a check. The borrower then uses the money to pay some expenses. Finally, the installment loan must be repaid over time. Usually, this is done through equal monthly payments.
How do I get an Installment Loan?
Although the installment-loan process itself is quite straightforward, it is important to be familiar with each step before you borrow.
Choose the right installment loan for you
First, you must choose the right loan for you. You will first need to determine if you require a particular type of loan depending on your situation.
compare all the loan options available
You should then compare your options based on their terms and your requirements to choose the one that is most suitable for you.
Send the application
The loan issuer will need your personal information such as name, address, birth date, and Social Security number. Additionally, financial information will be required such as income and employment status. The lender will also always conduct a credit check on your credit during the application process.
Spend the loan
You can spend the loan funds once you have received it
Pay the loan
Pay your loan in monthly installments. Your lender will ask you to make regular payments, usually monthly. The process will continue until the loan is fully paid. If you pay your loan on time, the lender will report positive information every month to credit bureaus. This will improve your credit score.
Different types of Installment Loans
Personal loans can be used to pay for almost anything. The typical range is $1,000 to $100,000 with payoff periods of 12 months to 84+, depending on the lender. Personal loans typically have an APR of between 4% to 36%. Personal loans require a credit score of between 585 to 700. We have a pre-qualification tool that will let you know if your credit score is adequate.
Home loans or mortgages allow homeowners to finance a home. The mortgage issuer retains partial ownership of the property until the borrower pays off the full mortgage. You risk foreclosure if you are unable to pay off the mortgage.
Home Equity Loans
People who have a mortgage but need extra cash for other expenses can apply for home equity loans. These loans allow people to borrow part of the difference between their home’s value and the remaining mortgage payment. However, the loan is secured by your home so you could face foreclosure if you don’t make payments.
Auto loans are used to finance the purchase or lease of a vehicle. These loans typically last between 24 and 72 months with an APR of between 2% and 6%. Although there is no minimum credit score for auto loans, terms will be better if you have a higher score. Auto loans are often secured by your car so you could lose your vehicle if you don’t make the payments.
Student loans are loans to pay for education and other related costs, such as housing and food. Some loans are federally backed while others can be private. federal student loans can have interest rates of around 2% to 5.5%. Most student loans last between 10 and 30 years.
The most unusual type of installment loan is credit-builder loans. They operate in the exact opposite manner to a regular loan. The lender makes monthly payments and then deposits the money in a savings account. After you make all the required payments, the money is available to you.
Credit-builder loans are used to report positive credit information to credit bureaus every month, establish or improve credit history, and make monthly payments.
The pros and cons of installment loans
Although they are the most common way to borrow money, installment loans have their advantages and disadvantages.
Pros of installment loans
- It is possible to make large purchases affordable over time
- Consistent monthly payments
- Different types of loans can be used to cover a variety of needs
- Can be paid off early and usually without penalty
Cons of Installment loans
- Revolving credit is not allowed for one-time borrowing. However, it allows for borrowing on demand.
- May require collateral
- There may be fees such as origination fees for personal loans and closing costs.
- They cost more interest for the longer they last
Are Installment loans good for your credit?
If you pay your installments on time, an installment loan can help improve your credit score. The lender will send information about the loan each month to credit bureaus. You should improve your credit score by staying current with the loan payments.
Because of the credit pull, your credit score will initially show a slight drop. A higher debt load after you receive the loan will hurt your credit score. These negatives can be reversed by a few months of regular payments.
What if I fail to repay my installment loan?
In the short term, not paying off an installment loan could cause credit damage. If you are unable to pay the loan off, your credit score will be affected.
fixed interest rates
affect your credit score
applying for an installment loan
higher interest rates