Cash 1 Blog
Different Types of Installment Loans
An Installment loan is a general term used for examples of personal and commercial loans. It is a type of loan where you can borrow a set amount of money. Unlike a credit card or a credit line, which are forms of revolving credit, you must determine the amount of money you need before borrowing.
You repay the loan over a fixed period that you and your lender agree upon before you get your loan. It's typical to make monthly payments, but some agreements can vary. Every payment you make is called an installment, which is why it is an installment loan. Every payment will include paying off the principal of the amount borrowed and the interest on your debt.
An installment loan can have a reimbursement time of months or years. The interest rate could be permanent or adjustable, indicating it can go higher or lower during the loan term. Installment loans might include supplementary costs, for example, application or overdue fees. It's vital to review the loan contract before taking out a loan to comprehend precisely how much you'll need to repay.
There are two types of installment loans; unsecured or secured. An unsecured loan does not need any form of collateral, only a promise to pay back the debt. Think of medical debt, personal loans, or credit cards. A secured installment loan is backed by an asset equal to the amount being borrowed. Mortgages or car loans are examples of a secured loan.
Examples of Installment Loans
A mortgage is a loan that you use to purchase a home. The home itself is collateral, so if you're incapable of making payments every month, your lender could take ownership of it. Mortgages are structured in 10, 15, or 30-year terms. This loan will have either a permanent or adjustable interest rate. You'll also need to pay for closing costs and, possibly, private mortgage insurance if your down payment is less than 20% of the value of your home.
Similar to mortgages, a car loan uses your vehicle as collateral. Your lender will repossess your vehicle if you don't make payments as agreed. Car loans characteristically require a down payment. The more money you pay upfront, the less your installment loan will be. Car loan terms usually are 36 to 72 months, but longer durations are becoming common.
Personal installment loans are used for numerous reasons, such as consolidating debt or covering a sudden expense. Personal loans are unsecured, meaning they're not backed by collateral like mortgages or car loans. Consequently, their interest rates will be higher, depending on your credit history. You can take out a personal loan between $1,000 and $50,000 with reimbursement times of two to five years.
What Are the Pros and Cons of Installment Loans?
To better understand if this loan is right for you, it's good to know the benefits and the drawbacks. Check out the pros and cons of installment loans:
- Fixed payments - In most cases, installment loans will come with predictable payments, making it easier to control your budget.
- Defined payoff date - There is comfort in knowing that a specified date will pay off your debt.
- Fixed APR - Depending on your loan, you are guaranteed the same rate regardless of fluctuations in the market.
- Improved credit mix - Managing different types of credit shows lenders that you are a responsible borrower.
- Build credit - Make your payments on time, and your score will increase.
- Fixed amount - You can't borrow more money after the loan agreement is signed like you can with a credit card or line of credit.
- Based on credit - Your lender will charge a higher interest rate if your credit history isn't healthy.
- Authorized penalties and fees - Some lenders may charge application fees or prepayment fees.
- Need collateral - You may be required to secure an asset of value to qualify for your loan.
How Are Installment Loans Used?
Installment loans can be a better choice than other credit sources (for example, credit cards) since their interest rates are lower and fixed. While it may be convenient to put all your expenses on your credit card, it's frequently a wise financial decision to assess your purchases and make sure that you are not overspending on interest and payments.
Uses for Unsecured Installment Loans
Managing an unexpected expense
Installment loans can help you deal with any unforeseen expenses. A friend or relative might need help to pay for a surgical procedure not covered by their insurance. Your vehicle might end up in an accident or need a repair. You can't always plan or even afford medical and car repair costs, but they can quickly cause financial stress. Paying those bills back in monthly installments can make strenuous expenses within your means.
If you need the money fast, it's worth looking into online loans. Many lenders have fast and uncomplicated applications that will permit you to get your cash in days.
Investing in yourself
During your career, there will be numerous times when you have to invest in yourself. You might need to pay for certifications, buy new equipment, or transfer to a different city for another job. Many of these expenses will require an upfront investment that you might not be capable of paying for right away. If you are confident these investments will pay off, you can use a personal loan to get the money upfront and pay it back over time.
Getting a higher education
If you have student loans, you probably have more familiarity with installment loans than you care to admit. These types of loans can be issued by the federal government or a private lender.
The U.S. Department of Education processes and approves student aid from the federal government. The benefits include repayment plans set by your income and fixed interest rates.
A student loan from a private lender such as a credit union, bank, or a state-affiliated organization has your terms and conditions set by that lender. Private loans for education are considered more expensive than federal student loans.
Uses for Secured Installment Loans
Purchasing a car
Vehicle loans are the most common types of installment loans. If you don't have the money to cover the direct charges of purchasing a car, installment loans can help deprived you of going into bankruptcy.
Purchasing a house
Buying a house will most likely be the biggest purchase of your life. Because it's unlikely you'll have all the money needed to buy a home, there are many types of mortgages readily available if you meet the requirements.
The Bottom Line
Installment loans can help you accomplish your financial objectives, like buying a house or furthering your education, by permitting you to pay back your loan over an extended period. Making payments on time and eventually paying off the loan will improve your credit.
Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.
With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.
When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.