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How Installment Loans Work and Help Your Finances

  • 4 MIN READ|
  • 0 Comment |
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  • by Joseph Priebe|
  • June 28, 2017 |
  • Loans

Installment loans can help improve your finances

Life comes at you fast.

Whether it's money for school, buying a car, or a surprise home repair that needs immediate attention, sometimes we need large amounts of money. And we need it right now.

However, many of us also have daily living expenses that can make it difficult to front that kind of money. Many of us don't have thousands of dollars set aside for unexpected financial events.

It can be tempting to put these big expenses onto a credit card. However, this can also be dangerous to your financial health. Missing payments, incurring late fees, and over-spending on your cards are all risks associated with making large lump sum payment via credit.

Moreover, improper use of credit can devastate your credit score. A bad credit score can make it much harder to qualify for things like buying a car or putting an offer on a home.

This is where installment loans can come in handy. 

What Are Installment Loans?

So, what exactly is an installment loan?

Actually, you're probably already familiar with them. Student loans, personal loans, and mortgages are examples of this kind of loan. These loans are repaid over time through a set schedule of payments, or installments.

There are three major components to an installment loan: term, rate (both interest and APR) and fees.

Term refers to the amount of time allotted to pay back the loan. This can be anywhere from one month to thirty years depending on the size of the loan.

Most loans come with interest rates. Interest rates can be the most expensive part of taking out a loan. When comparing lenders, be sure to gain a full understanding of the interest rates associated with each plan.

Additional fees can also be added onto the cost of an installment loan. Examples of these include application fees and processing costs.

Financial Benefits of Installment Loans

A lot of people choose to take out a loan only as a last resort. However, in some cases, opting for an installment loan over other forms of credit can be a better financial decision. Here's how.

Lower Interest Rates and Tax Benefits

As mentioned above, interest rates are a major factor to consider when considering debt and loan options. The lower the interest rate, the better.

Installment loans typically have lower interest rates than credit cards, thus ultimately reducing the total amount of money needed to get out of debt. Further, these interest rates are fixed. Borrowers can rest easy knowing the amount of money they owe a month won't fluctuate due to rising and falling rates.

This means you can pay off your debts quicker and cheaper - who doesn't want that?

Applying for a loan can also make you eligible for a tax benefit. Credit card debt doesn't result in any form of tax break or benefit.

Flexible, Fast, And Easy To Manage

Not only are installment loans a more economical solution for a large expense. They could also be an easier and faster debt solution as well.

Loans can be acquired same day through some financial lenders. Because the requirements for installment loans are more lenient than for other types of loans, it is a much quicker turnaround for borrowers in need of cash fast.

The repayment processes affiliated with installments are also very flexible. Longer payment periods are offered to make paying back debt easier month to month. installments can be made weekly, bi-weekly, or monthly depending on what is most feasible for the borrower and the final due date. 

Installment loans are often easier to manage than other types of loans. Credit card debt, for instance, can be considered a revolving debt - meaning you can continue to charge it again and again. Thus building more debt.

Installment loans require a separate application process for each new sum of money required, making it harder to overdraft. Plus, the scheduled payment format can make it easier to budget installments along with life's other routine expenses. 

Can Improve Your Credit Score

A lot of prospective borrowers worry about how loans will affect their credit scores. To that concern, there is good news - installment loans can help increase your credit score! 

Credit scores take a number of factors into its calculation - types of credit used, payment history, the amount of debt owed, etc. An installment loan can help in the following ways:

  • Diversifying the type of credit used. Building rapport among many credit lenders can have a positive impact on both your credit score and your likelihood to be approved for future loans. Diversity also determines about 10% of your credit score.
     
  • Improving payment history. Installment loans are easier to pay off than other forms of credit given their length and lower interest rates. The more on-time payments made, the better your financial history becomes. And since payment history accounts for nearly 35% of your credit score, these improvements will be reflected in your score.
     
  • Reducing debt. The most obvious way to improve your credit score? Have less debt. Installment loans offer a scheduled timeline of payments to ensure you are paying your dues in a timely and effective manner. Not to mention the lower interest rates.

When Should You Use an Installment Loan?

Installment loans can be extremely useful when used in the right situation. Here are some of the most common applications of an installment loan over other forms of borrowing.

  • Returning to school or other career building pursuits
  • Buying a car
  • Applying for a house
  • Unexpected expenses (medical bills, car repairs, home improvements, etc.)

Of course, taking out excessive loans can be dangerous to your financial stability. When considering an installment loan, assess your ability to pay off the requested amount in a timely manner without additional assistance from another loan provider.

Unsure whether an installment loan is the right solution for your outstanding debt? we can help you make sense of it all. Reach out to an installment loans direct lender for a personal consultation and more information on available options.  

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