For many people, the term 'installment loan' might sound alien. Yet, most working adults have used one of the many types of this consumer credit available at some point or another.
For those unfamiliar with the term, installment loans are a type of credit that allows you to borrow a predetermined amount of money. The money is then repaid over a set number of payments; these are usually monthly. This form of lending is typically associated with a fixed APR, meaning that your installments' size remains the same over the lifetime of the loan.
This type of lending is perfect for anyone, even people with a low credit rating, who urgently needs cash to deal with an emergency or unforeseen expenses. However, before applying for an installment loan, it's essential to understand its benefits and drawbacks. These are discussed below.
Most Common Types of Installment Loans
Auto Loans
Auto loans typically range from 12 to 96 months. Although financing with longer terms results in lower monthly repayments, they come with higher interest rates, meaning that a vehicle bought over 96 months will end up costing you more than buying the same car over 36 months.
Mortgages
A mortgage or home loan is usually repaid in monthly installments over a period of 15 to 30 years. Although some of these loans come with fixed interest rates, many have a variable APR attached to them, meaning that your monthly premiums may vary.
Personal Loans
Personal loans are possibly the most common form of installment loans. They come with terms ranging between 12 and 96 months and can be used for various purposes, such as debt consolidation, paying unforeseen expenses, or remodeling your kitchen. However, this type of financing typically comes with a higher APR and often doesn't require collateral.
What Benefits Are Associated With Installment Loans?
Installment loans are designed to provide you with the cash you need with affordable terms of repayment. This loan type's overall cost depends on your credit history, personal needs, and the lender. By opting for one of these, as to other forms of credit, you'll benefit from:
- Lower periodic repayments
- Fast processing time
- Manageable monthly payments
- Rebuilding your credit profile
Personal loans generally come with predictable repayments. This stability makes it easier to budget every month and helps you avoid defaulting on installments due to unforeseen changes to the amount you owe.
What Are the Drawbacks
On the downside, this type of lending limits you to the predetermined amount of money you applied for. Should you require more cash, you'll have to apply for a second line of credit. Therefore, when you opt for a personal loan, be sure to borrow enough to cover everything you set out to do.
Also, your loan terms and interest rate is primarily based on your credit score. If you've got a less-than-stellar or lousy credit rating, you're liable to pay a hiked interest rate. A higher APR means repaying more on the principal amount you borrowed and increased monthly premiums.
Additionally, there are various penalties and other fees associated with personal loans, including:
- Application fees
- Credit check fees
- Penalties for defaulting on payments
- Prepayment penalties
To Wrap Up
If you're looking to apply for an installment loan, it's essential to weigh up your options. Be sure that you can comfortably afford the loan and familiarize yourself with its terms and conditions. Having a thorough understanding of what's being offered will allow you to thoughtfully shop around to find the personal loan best suited to your individual needs.