What is an installment loan?

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Installment loans — loans that let you borrow money and pay it back in equal monthly installments with a fixed interest rate — are a handy personal financial tool if you’re looking to pay off large debts in small installments. manageable.

The most common type of installment loan is a personal loan, but other examples of installment loans include loans without credit checks, mortgages, and car loans.

What is an installment loan?

Installment loans allow individuals to borrow a predetermined amount of money, disbursed in a lump sum, which can be repaid over time. Typically, these loans come with a fixed interest rate and require regular monthly payments that stay the same each month. A portion of each monthly payment is applied to the principal amount borrowed, and a portion is applied to interest on the loan.

Installment loans differ from credit cards or lines of credit, which generally have more flexible repayment terms and variable interest rates, meaning you don’t have a predictable monthly payment. With installment loans, you always know what to expect when your monthly bill is due.

Types of installment loans

Installment loans come in many forms. Although they work the same way, each type has different features, loan purposes, and average interest rates.

Personal loans

A personal loan is money provided by a lender that can be repaid in monthly installments over a set period of time at a fixed interest rate. These loans are available from online lenders, private lenders, and credit unions.

Proceeds from a personal loan are provided in a lump sum and can be used to finance a variety of needs.

“A personal loan can be a great financing option for consumers looking to budget for a wide range of expenses from auto repairs to home renovations,” says Mark Victoria, head of unsecured loans at TD Bank. “A very common and effective use of a personal loan is to consolidate higher interest credit card debt.”

Personal loan repayment terms generally range from 24 months to 60 months, but some can go as long as 72 months.

Loans without credit check

No credit check loans are often offered by payday lenders who do not check your credit score before lending money. Payday loans are intended to help consumers in times of emergency or when they have no other source of credit.

Payday loans are often short-term, high-cost loans. When applying for these loans, your credit score does not matter because your paycheck is used as collateral against the borrowed amount.

When you are approved for a payday loan, you give the lender a post-dated check for the amount borrowed plus any costs. The lender keeps this check and gives you the money. On your next payday, the lender cashes the check you provided.

If you take out a loan online, you authorize the company to withdraw the funds from your bank account during your next payday after you have been paid by your employer.

The amount of the personal loan is lower than that of a personal loan, often limited to around $500, but in some cases the limits are higher.

Mortgages

Another common installment loan is a mortgage. The most popular mortgages require homeowners to repay the borrowed money over 15 or 30 years with a fixed interest rate. Because a mortgage is secured by collateral, like a house or condo, interest rates tend to be lower.

Car loans

Car loans are another popular type of installment loan. Typically, consumers put a down payment on a car or apply the trade-in value of their existing car, then finance the balance of the purchase price with an auto loan. Monthly payments are made to lenders until the car loan is paid off in full.

Advantages and disadvantages of installment loans

The advantages of installment loans can make them an attractive option, but it is also important to consider the possible disadvantages that come with these loans.

Advantages of installment loans

Installment loans have many advantages. A few include:

  • Regular monthly payments: The monthly payments remain the same throughout the duration of the loan, which facilitates the constitution of a family budget and the payment of the invoices continuously.
  • Credit score increase: Establishing a payment history with no late payments on an installment loan helps improve your credit score.
  • Refinancing opportunities: If interest rates drop or your credit score improves, refinancing into a new loan may be beneficial as it will likely lower your monthly loan payments or shorten the term of the loan.

Disadvantages of installment loans

If you’re considering taking out an installment loan, be sure to consider some of the downsides:

  • Fixed payment: Since installment loans deposit funds in a lump sum, you cannot increase the amount borrowed if you encounter a new financial obstacle or an emergency.
  • Potentially long payment schedule: Payment terms for installment loans can be long. It’s important to make sure you’ll be able to make the payments on time each month for the duration of the loan you’re accepting. Conversely, if you want to prepay your loan, be aware of any prepayment fees your lender may charge.
  • Can be expensive for bad credit: The interest rate you receive from an installment loan largely depends on your credit score. If you have below average credit, you may be denied a loan or offered a high interest rate that will make monthly payments more expensive.
  • Potential charges: If interest rates drop, you can choose to apply for another personal loan at a lower rate. However, you may need to pay other origination fees to process the loan.

Should I take out an installment loan?

When deciding if you should get an installment loan, you need to weigh the pros and cons. For example, if taking out an installment loan can help you refinance your high-interest debt, taking out this type of loan might be a good idea. Also, if you prefer a fixed monthly payment, this may be a better option than using a credit card or line of credit.

However, if you have bad credit, taking out a loan may not be a good idea unless you apply to a co-signer with good credit to potentially get a lower interest rate. Also, if you prefer to borrow money as needed, an installment loan will not be your best option.

If you decide that taking out an installment loan is the best option for you, make sure you can afford to pay off your debt on time. Failure to repay a loan could significantly affect your credit score and affect your ability to access credit in the future.

Where to get an installment loan

Installment loans can be obtained from a bank, credit union or online lender. Shopping around will help you receive the lowest fees and interest rates.

Many lenders allow you to apply for a mortgage, car loan or personal loan online. Personal loans are often approved within days, while car loans and mortgages require a more thorough check of your credit history and credit score.

“As with all loans, the lender decides whether you qualify based on your income, credit history, and credit experience,” says Todd Nelson, senior vice president at LightStream.

No matter what type of loan you’re looking for, we recommend checking the rates of a few different lenders before committing. Many online lenders offer pre-qualification, a process where you enter a few details about yourself and desired loan terms in exchange for a quick decision on whether or not you qualify for a loan with that lender. . Prequalification uses a soft credit check, which means your credit rating will not be affected.

Alternatives to installment loans

Installment loans aren’t the only way to access the cash needed to make big purchases or pay off debt. Here are some other options.

Personal lines of credit

A personal line of credit (PLOC) is a generally unsecured revolving line of credit account that has a variable interest rate. These accounts work much like a credit card. You request a specified amount of credit, then access the money as needed. Refunds are based on the amount of money that was used.

Applying for a PLOC generally does not require providing collateral, such as your home. However, PLOCs are often reserved for consumers with very good credit histories, often those with a credit score of 680 or higher.

Credit-generating loans

Typically offered by community banks and credit unions, credit building loans are for those who don’t have a strong credit score or who have little or no credit history.

With credit loans, you request a specific amount of money from a lender and make monthly payments for the amount borrowed.

However, in the case of a credit loan, you do not receive the money up front. Instead, the lender deposits the loan amount into a secured savings account controlled by the lender. The consumer makes fixed monthly payments for the loan for a fixed term, and once the total loan balance is paid in full, the lender releases the funds.

The main advantage of a credit building loan is that during the repayment period, the lender will report the payments on time to the credit bureaus. So even though you won’t have access to the money during this time, you will still improve your credit score.

Alternative payday loans

If you are a member of a credit union, you may also consider a payday loan alternative (PAL). These loans are available to people who have been members of a credit union for at least one month and typically allow borrowing between $200 and $1,000 for one to six months.

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