Installment loans are the best option for most people to obtain credit for short-term and long-term financial obligations.
According to Experian data, about a quarter of Americans have personal loans, and the same report suggests that most people borrow for large purchases, debt consolidation, home improvements, and debt financing.
To help you understand installment loans better, here we answer your questions.
What Are Installment Loans?
An installment loan allows borrowers to repay the funds in scheduled payments. The repayment amount includes the principal and interest each month.
Even though the amount payable is fixed, the proportion of interest and principal in a particular installment may differ.
For example, if you take out a $10,000 installment loan with a fixed monthly payment of $1,000, the principal and interest payable per month may be $800 and $200, respectively.
What Are The Different Types of Installment Loans?
Typically, there are two types of loans: fixed-rate and floating-rate loans.
The interest is the same for fixed-rate loans and doesn’t change during the loan tenure. By contrast, under the floating installment loans, the interest amount is higher in earlier months but reduces over time as the outstanding loan balance decreases.
Installment loans can also be secured or unsecured. Examples of unsecured installment loans are personal loans where the lender doesn’t ask for security or collateral when advancing the loan.
On the other hand, a secured installment is a mortgage or car loan where the lender asks for collateral before approving the loan. Collateral, in this case, can be a house or a motor vehicle.
Before extending a non-secured installment loan, the lender will assess your ability to pay by asking for payslips from your employer or account statements. They will also look at the credit reports to evaluate your creditworthiness and assess your overall liabilities or debts.
Because there’s no security, the interest rate may be higher. If you have bad credit, the lender may decline your application. However, some lenders may approve a bad credit application if you provide an assignee, guarantor, or collateral.
How Do You Apply For An Installment Loan
The application process for an installment loan is the same for most lenders; however, it may differ for a secured or unsecured loan. You need to get in touch with your lender and submit a request to get started.
With online banking, you don’t have to visit the bank’s premises; you can submit all the details online. For example, if you want to apply for installment loans Waco TX, you must state the purpose of the loan and provide income statements. Next, the lender analyzes the application and your ability to repay.
Eventually, they will disburse the loan to your bank account if you fulfill all the conditions. For secured loans, the application process may prolong because you must provide collateral such as a motor vehicle or property.
Your lender will want to ascertain if they are legally yours, and therefore you must provide a title with your name. There’s also a valuation process to establish their actual value.
What Are The Advantages Of Installment Loans?
Installment loans can be tailored to meet specific needs. So, you can take out such a loan depending on your ability to pay and use it to meet current conditions such as property purchases or pay immediate expenses.
Another advantage is that the repayment amount is fixed every month, allowing you to plan and manage financial goals. Also, if you pay off the loan early, you can forego the outstanding interest.
What Are The Risks Of Installment Loans?
Normally, installment loans have high processing fees, which increases the cost of borrowing. Failure to pay on time or missed payments can attract penalties.
Long-term loans can interfere with your financial goals and obligations. For example, they may reduce your future borrowing ability.
How Do Installment Loans Affect Your Credit Score?
Like all other types of credits, installment loans can affect your credit score if you fail to pay on time or skip payments.
To avoid this, you can set a standing order on your account so that the amount is deducted directly from your income. Making all the payments on time will help you build your credit score.
Conclusion
An installment loan is an excellent tool you can use to finance your urgent expenses, purchase a property or car or do some home improvement projects. But there are drawbacks as well, which you need to keep in mind.
If you take out such a loan, reviewing different institutions and comparing their rates is important.
Veeramachineni Lalitha
I am Finance Content Writer. I write Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. My experience details : Linkedin