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Installment Loans Definition

An installment loan is a type of loan that allows people to borrow money and then pay it back over time. The amount borrowed can often be larger compared to other loan options like payday loans. Installment loans can be used to buy items consumers are unable to afford with cash.

How installment loans work

An installment loan contract will include information about the interest rate, payment schedules and penalties for late payments. Although installment loans can be paid off early, there might be penalties for missed payments.

Collateral may be required for some installment loans. These types of loans are referred to as secured installment loans. Examples of secured installment loans include a mortgage on a house or an auto loan. Unsecured installment loans, such as personal loans, can also be obtained. The loans do not require collateral. These loans can be used for many purposes depending on your needs.

How Do You Qualify For an Installment Loan?

To evaluate your application for an installment loan, as with all types of loans, the lender will consider a variety of factors.

Your credit score. 

Your credit score is a key factor in getting approved for any type of loan. A FICO score of 700 or higher is considered excellent. An 800 or greater is considered good. Higher credit scores will help you get a lower interest rate.

Your credit history

This includes things like your track record of paying your debts on-time and any judgments, bankruptcies, or other public blemishes.

Your debt-to-income (DTI) ratio

 This is the sum of all your monthly debts and payments. Lenders consider those with lower DTI ratios to be more credit-risky.

Verification of income

Lenders want to see proof that you have a steady and reliable income source that will enable you to pay all your payments on time.

In some cases, collateral might be required to secure a loan. If the loan is secured by an asset such as a car or a house, the collateral will be that asset. You might need to provide additional collateral in other situations. You might need to provide additional collateral such as cash set aside or a lien on any other assets.

What are the benefits of an installment loan?

  • Predictable payments are one of the greatest benefits of an installment loan. Installment loans typically have a fixed monthly payment that is amortized over a set period. This can make budgeting much easier and help you plan your finances.
  • Fixed-term loans installment loans offer the security of knowing that the loan will be paid off if all payments are made on time and in full.
  • An installment loan can build credit and show creditors that you are a responsible credit risk by paying your debts on-time.
  • An installment loan allows you to purchase major items without needing to draw on cash reserves. 

Are you looking for an installment loan?

There are many places you can get an installment loan. Here are a few:

Banks

Banks can be a great source of various types of installment loans such as auto loans, mortgages, and personal loans. Although banks are open to new customers, it is better to be a customer when applying. It is a good idea to start a relationship early with a bank, beginning with a checking or savings account, if you expect better future borrowing requirements.

Credit unions 

Credit unions provide financial services to members according to the organization they work for, their affiliations such as military or geographical. For borrowers with poor or average credit, credit unions offer better terms and lower interest rates than banks on installment loans.

Online lenders 

This avenue is available to many borrowers, whether they are online credit unions, online banks, or online lenders. Online lenders can provide all types of installment loans. They cater to lenders with different financial circumstances and borrowing requirements. It is easy to apply for a loan online.

Examples of Installment loans

Mortgage

An example of an installment loan is the fixed-rate mortgage on a home. The loan term is set, with either a 30-year or a 15-year term being common. Your principal and interest payments are fixed. However, your total payment may change depending on changes in local property taxes. If these payments are escrowed by your mortgage lender, they will be paid. If you default on your loan, the lender can foreclose on the property as collateral.

If you have made all payments during the loan term, your loan will be paid in full. You can then move into your home without any additional costs. The majority of mortgages allow for extra principal payments, which allows the borrower to repay the loan faster. If the property is not sold before the mortgage is paid, the loan must be paid out of the proceeds from the sale of other assets or the proceeds of the purchase.

Auto Loan

An auto loan is an installment loan with a fixed term. While a typical loan term is three to four years, longer-term loans are available for borrowers who want to finance more expensive vehicles.

You can get auto loans through credit unions, banks, and online lenders. Dealerships often have relationships with lenders, including some captive lenders. To ensure the best deal, shop around to find the best rate and terms for your car before you buy it.

The vehicle is used as security by the lender. If you do not make your loan payments, the vehicle may be taken away.

Personal loans

Personal loans are available for many purposes, including consolidating high-cost debts or paying unexpected costs like medical bills. Many terms can be used for personal loans. The average range is between 12 and 96 months.

Personal loans are usually unsecured so interest rates tend to be higher than other types. This type of loan is offered by several lenders so make sure to shop around before you make your final decision.

Installment loans offer fixed-rate solutions for your borrowing requirements, such as major purchases or consolidating debt. You don’t have to wait until retirement, nor is it too early or too late, to start planning and investing for your future. Have questions about investments, money, retirement or money? We have the answers.

 

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