Your Definitive Guide to Installment Loans

Loans provide the much-needed financial support when you need it most. Besides, repayments become more manageable and convenient when you get to pay back your loan in installments. You can easily avail of this benefit with an "installment loan".

The term installment loan is often loosely used to refer to different types of commercial and personal loans. It is essential to know the meaning, uses, types and advantages, and disadvantages of any form of credit to help you get out of any financial hardship.

If you're looking to understand the ins and outs of installment loans, this guide is for you.

What Is an Installment Loan?

An Installment Loan is a type of loan that allows you to borrow a lump sum of money upfront and repay in several equal payments spread over an agreed period. Easy repayment with equated monthly installment (EMI) makes installment loans one of the best loan options to finance large purchases such as buying a car, house, or major appliances. Qualifying for an installment credit is also relatively easy and funding is fast. The best part is that you get to choose the loan term based on your budget. You can choose a longer loan term with smaller monthly payments or a smaller loan term with comparatively larger monthly payments.

EMIs are the crux of installment loans, containing a little interest and principal amounts. As a borrower, you should know how installment loans work and calculate your monthly payments.

How Do Installment Loans Work?

An installment loan has three main components: principal amount, interest rate, and loan term. The lump-sum amount you borrow from the lender is called principal, and the interest rate is a percentage of your principal that you are charged for borrowing money. The loan term is the total number of months you've chosen to repay the loan.

These three components help in deciding your scheduled monthly installment amount. You can either use online calculators to know the value of your equal monthly payments or calculate it yourself.

Monthly Payment For Installment Loan = (Total principal of the loan + Total interest on the principal)/ Total number of payments during the loan tenure.

For example, let us assume you take out an installment loan for $2,000 at an interest rate of 5% to be paid back over 12 months. Since an installment loan is paid back in monthly installments of an equal amount, you will be making the payments in 12 monthly installments.

Typical 12 Month Example:
$2,000 installment loan assumes a 12 month term with monthly payments.

  APR Biweekly Payments Repayment Time Total Payments Total Interest Paid
  5% $171.21 12 Months $2,054.58 $54.38
Rates are calculated using the simple interest method. APR calculation is based on monthly payments, with your first payment being 30 days from the effective loan date.

As you can see from the above calculations, you would make 12 monthly payments of $171.21 each to pay back the installment loan.

Now that you know how most installment loans work by offering you the benefit of fixed monthly payments, it's time to learn about the wide range of installment loans based on the usage of collateral and further the purpose of your loan.

What Are the Types of Installment Loans?

Before learning about the various types, it's essential to know that all installment loans fall under either of the two categories: secured and unsecured. When your installment loan is backed by collateral like a house, car, or any asset you own equal to the borrowed amount, your loan becomes a secured installment loan. These loans include mortgages and auto loans.

On the other hand, unsecured installment loans don't require any collateral. These loans include personal and student loans. Knowing a few examples of installment loans will help you better understand how and when to choose the right type according to your financial need.

installment-loan-uses buying a vehicle

Auto Loans

You can get an auto loan when you don't have enough funds to buy a vehicle. This is a type of installment loan where you can apply for an amount equivalent to the vehicle's value or your need, whichever is less. Once you get the funds, you become liable to pay equal monthly payments until the loan is fully paid. Since you're using your vehicle purchased as collateral for the loan, the lender has full rights to repossess and ask you to pay the difference after selling the car. This difference amount is called deficiency balance, including the remaining loan balance and the cost of repossession.

installment loan uses buying a house

Mortgages

Like auto loans, a mortgage is again a type of installment loan that you can use to buy a home. Here, the property in question serves as collateral which makes this a secured loan. You can choose to pay your mortgage payments instead of rent and get ownership of your house in a few years. Buying a home is probably the biggest purchase you will ever make. For this reason, the term of a mortgage is usually kept lengthier, like 10, 15, or 30-year. If you default on your mortgage, your lender can take ownership of the property.

installment loans examples personal loans

Personal Loans

As the name may suggest, personal loans are installment loans that you can finance almost anything. Unlike auto loans and mortgages, a personal loan is not restricted to any specific purpose. You can even use a personal loan to make a large purchase like buying a car or use it to cover unforeseen expenses like a sudden car repair. In general, personal loans are unsecured, but some lenders offer secured personal loans options, especially for people with bad credit.

installment loans examples student loans

Student Loans

One of the widely used unsecured installment loans, a student loan, is used to help pay for any expenses related to your education. Unlike any other installment loan type, your student loan monthly payments typically begin a few months after you graduate. This deferred repayment option gives you time to find a job and start making total payments using your income after the grace period ends. Since the monthly payment amount remains constant throughout your loan term, you can create a budget right from the day you start earning. However, some lenders offer variable-rate student loans where repayment amounts could change over time.

Are Installment Loans Good Idea?

An installment loan is such a versatile loan option, and there are numerous advantages of installment credit that you might not know yet. You can borrow it for a wide variety of reasons, from paying for your home renovation to car repairs, clearing unexpected medical bills to sometimes even consolidating all your existing debts. Moreover, installment loans allow you to borrow much-needed funds and pay them back little by little in installments every month.

If you are a responsible borrower and make payments on time, installment loans can be one of the best loan options for you. On the contrary, getting an installment loan would be questionable if you don't have a steady income and know that you won't cope with monthly payments. You can get rid of a high-interest rate installment loan by refinancing, but you can't escape the consequences of bad financial behavior on your credit scores.

What Are The Pros and Cons of Installment Loans?

There are both advantages and disadvantages of an installment loan like every other loan. To determine if this loan is right for you, here are the pros and cons of installment loans that you may want to consider.

Pros

  1. It's an ideal funding option for minor and significant financial needs emergencies.
  2. You get a stable interest rate and a fixed number of payments throughout the loan term.
  3. It has the flexibility of choosing loan tenure according to your ability to pay each month
  4. You can increase your credit score by making your payments on time.
  5. It has scheduled monthly payments that make budgeting easier.

Cons

  1. You are not allowed to borrow more money after the loan agreement is signed, like in the case of a credit card or line of credit.
  2. Due to a fixed interest rate, you don't gain from any drop in the market rate.
  3. There's potential to hurt your credit due to late or missed payments.
  4. Budgeting for monthly payments can get complicated with variable income.
  5. Some lenders may charge application fees or prepayment fees.

Where Can I Get an Installment Loan?

Depending on your needs, you can get an installment loan from a bank, credit union, or an online direct lender for installment loans. You might also choose to apply through a mortgage broker, car dealership, and other places, depending on the use for the loan.

Your local bank may give you a low-interest rate or flexible repayment terms if you have a good credit score. Your local credit union may also consider your application if you cannot get an installment loan from the biggest banks, but you often need to be a credit union member before they loan to you. Applying for an installment loan with one of the reputable online lenders is convenient and quicker than other options.

You may find that the APRs are a bit higher online, especially if your credit is not great. A company like CASH 1 offers installment loans with flexible terms, even if your credit is not great. They even have physical locations and a website where you can apply online. Remember, once you have the approval from the lender, make sure to read the fine print before signing the loan agreement.

What Can I Use an Installment Loan For?

After knowing that installment loans are suitable for you, the thought of why and when to opt for an installment loan can pop into your head. There are several reasons why you might want to borrow a lump sum amount, and here are some of them:

Buying a Vehicle

Buying a House

Starting a Business

Financing a Wedding

Consolidating Multiple Debts

Covering Unexpected Expenses

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 on time without additional assistance from another loan provider.

How Can I Get an Installment Loan?

1

Find a Suitable Lender
Finding a suitable lender is crucial for getting any loan. Check reviews of different lenders and their loan requirements to find the best fit.

2

Fill in the Application Form
Start your application by carefully mentioning every detail accurately. Choose an application method out of those offered by the lender.

3

Submit Your Documents
Check the list of loan requirements and submit each document to qualify for the loan.

4

Get the Loan Approval
Based on your ability to repay, proof of income, and state of residence, most lenders decide on the loan approval and an estimated loan amount.

5

Receive Your Funds
The funds will get deposited to your bank account on the same day or the next day.

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How Do You Qualify for an Installment Loan?

Different lenders have different loan requirements. Hence, one must always conduct thorough research on the eligibility criteria of some of your state's popular installment loan lenders. We've listed a few general installment loan requirements for you to take note of here:

Typical Installment Loan Requirements

  1. Proof that you are at least 18 years of age
  2. A Proof of residence like a copy of a utility bill or lease agreement
  3. An Open Checking Account
  4. Not on Active Duty in Military
  5. Proof of Income like Paystubs, a bank statement, or a letter from your employer (on company letterhead) stating your income.
  6. Credit References if required
  7. A Government-Issued Photo State Identification Card

How Does an Installment Loan Impact Your Credit Score?

There are mainly two instances when an installment loan can affect your credit score: when a lender runs a credit check on your credit report and when you fail to make timely payments.

You need not worry if an installment loan lender performs a credit check unless it is not a hard inquiry. Only hard inquiries on your report adversely affect your credit score. In addition, missing a payment or making late payments can negatively impact your credit score. This certainly means that you can boost your credit score if you make on-time payments.

Is a Personal Loan an Installment Loan?

Yes, personal loans fall under the category of installment loans. These loans are not limited to being used for one specific purpose. This means a personal loan helps you borrow a sum of money for any financial emergency and pay it back with predictable monthly payments.

Nevertheless, some lenders offer personal loans that operate slightly differently. Hence it is always advisable to read all the loan documents or contact individual loan providers to know how their loan works.

Do Installment Loans Work for Debt Consolidation?

The main aim of consolidating debt is to save money and reduce the hassle of managing multiple loans at once. And when you can get an installment loan that offers you a lower interest rate than the average rate of all your existing loans, installment loans certainly result in a great debt consolidation option. Besides, paying back in installments makes it all the more convenient for those with a steady income.

Nevertheless, some lenders offer personal loans that operate slightly differently. Hence it is always advisable to read all the loan documents or contact individual loan providers to know how their loan works.

CASH 1 Installment Loan Advantage

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.

If you find yourself in a financial bind, CASH 1 offers short-term installment loans in Arizona and Nevada.

A company like CASH 1 offers installment loans with flexible terms, even if your credit is not great. They even have physical locations and a website where you can apply online. Once you have the approval from the lender, make sure to read the fine print before signing the loan agreement, you will want to know if there are any hidden costs or conditions.

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