What Is An Installment Loan?

What Is An Installment Loan?

There are those instances when one requires cash but they do not have it. In such cases, loans can be very helpful. An installment loan is one type of loan, where you borrow a specific amount and pay back in series of regular fixed payments. The scheduled payments may range from few months up to 30 years. Examples of installment loans are auto, student, mortgage and personal loans. The loans are regulated and licensed by the state and federal consumer protection agencies.

How does an installment loan work?

When a borrower applies for such a loan, the lender may require down payment, processing fees, and origination fees. Some of the loans require collateral but others require no collateral. Loans with no collateral have high-interest rates. How does one qualify for an installment loan? The lenders look out for things such as a borrower’s credit score, debt-to-income ratio, and annual income. The above factors determine how much a borrower can afford to pay.

The amount of the monthly payment depends on the amount of the loan, interest charged and the term of the loan. In most cases, the interest charged is fixed at the time of borrowing, and does not change over the months. It is essential for the debtor to pay in good time, as failure to pay accrues a penalty leading to higher payments.

Benefits of an installment loan

It is affordable as it depends on what one can afford to pay. The payments are cheap because they are spread out over the term of the loan. Installment loan has attracted many people, as it is easy to qualify for such a loan. People with bad credit scores can get a chance with this kind of loan. This closed-end credit is flexible as it accommodates a borrower’s specific needs. Being a long-term loan, a borrower is able to budget for it, since they are aware of the specific amount. Installment loans can add a new type of account to a person’s credit mix and help to boost the credit score.

Disadvantages

  • Lump sum repayment may be penalized
  • High-interest rates compared to some short term loans
  • Require a new application if one needs another loan

Differences between installment loans and some revolving line of credit

Installment loan requires a borrower to pay equal payments till they fully pay. On the other hand, credit card monthly payments can fluctuate due to things like a drop in credit score, and missed payments. Credit cards credit limit may increase when one makes on-time repayments and the credit can be used for several purposes. The same cannot be said about installment loans as the amount in some cases can be used for one purpose.

Would you recommend Installment Loans?

Before choosing a particular type of loan, it is important to know the pros and cons of each. Installment loans may be great in some cases and revolving line of credit advantageous in others. Installment loans are ideal for individuals and businesses that lack cash to purchase a service or good. The key to making such decisions is ensuring that one does not overextend their budget.