Installment loans can be used to mitigate a variety of financial hardships; everything from last minute inventory for your startup, emergency medical expenses, or unexpected equipment repairs. An installment loan differs slightly from credit cards and lines of credit. Keep reading to learn more about how installment loans work, and when is a good time to utilize one.
What is an Installment Loan?
Installment loans are set amounts of money that are repaid in installments over the course of a specified amount of time. Technically, auto payments and mortgages fall under the category of installment loans, since you’re paying a fixed amount in monthly installments until the principal balance and any interest are paid off.
Installment loans can also be offered in terms of personal loans, which can be used for unexpected personal expenses if your savings will not cover them. These popular loan options often have between a twelve-month and forty-eight month repayment time; depending on the provider, how much you borrowed, and what the loan terms are.
What are the Terms?
The terms of installment loans, including interest rates, fees, and payback period, will all depend on a number of factors, including:
- Your personal credit score and history
- The lender you’re borrowing from
- The purpose of the loan
- Collateral (if necessary)
- Other terms based on lender requirements
Your personal credit history and score may have an impact on whether or not you qualify for an installment loan, and whether or not you’ll get a manageable interest rate. If you’re approved for an installment loan with poor credit, there’s always the possibility you’ll end up paying a high-interest rate for the loan. If you’re opting for a cash advance loan, your interest rate will probably fall in an even higher range; making the loan quite expensive. These kinds of loans should be reserved only for true emergencies.
Are There Extra Fees?
Some installment loans will require you to pay fees based on the lender’s requirements. You may have to pay origination or setup fees, depending on your lender. It’s important that you account for any extra fees you may incur when deciding to apply for an installment loan. It’s best to get a full picture of the overall cost of the loan before signing any documents.
When Should I Use One?
If you’ve incurred sudden expenses, such as home or car repairs, emergency legal fees, or unexpected business expenses, an installment loan may be able to help you get back on your feet and your finances under control. You don’t want to use installment loans to purchase luxury items or electronics if you’re living on a budget.
You’ll likely be declined if you ask for an installment loan for a 4k HD television, and you have a low credit score and fixed income. Be sure that you can afford the financial burden of an extra monthly payment before applying for any type of loan. If you can’t afford a loan, you’ll end up defaulting; resulting in consequences that can seriously impact your credit score and history, making it even more difficult to acquire loans or credit cards in the future.
The bottom line when borrowing with installment loans is to be smart about it. Intelligent borrowing ensures that you’re paying attention to the overall cost of the loan, your interest rates, etc. Often, people who are borrowing don’t account for the fact that high interest is actually quite a lot on a principal balance and adds to the amount you pay back. This essentially means that on top of the $5,000 you borrowed, you’ll be paying an additional 30% in interest. The cost of your loan will end up being significantly more than what you originally borrowed!
Installment loans are popular options for those in need of immediate funding due to unexpected circumstances. With loan terms that are easy to understand, and variable repayment times, an installment loan could be just what you need to pull yourself out of trouble or an emergency. Whatever your reason for borrowing money may be, always be sure to borrow smart and read all of the terms of your loan. The more information you have at your disposal, the better the borrowing (and repayment) decisions you can make.