An installment loan is a term that refers to the majority of personal loans and commercial loans that are extended to borrowers. This is a type of loan that requires regularly scheduled payments on a debt until the loan is repaid. Each payment will go towards both the principle of the loan and the interest.
Installment Loan Basics
Some of the most common installment loans include mortgage loans, car loans, or personal loans. Nearly all installment loans, except mortgages, offer a fixed interest rate where the interest will be charged over the entire term of the loan is the same at the end as it was in the beginning.
Payment amounts are regular and typically due monthly. The payment will stay the same throughout the entire length of the loan making it easy to fit into a budget to account for the payments that will be required.
Installment Loan Process
The first step of the loan process is applying for the loan by filling out an application with a lender. You will be asked to explain what the loan will be used for, such as buying a car or another major purchase. The lender will discuss issues like down payment, loan term, payment schedule, and payment amounts with you.
The lender will take into consideration your creditworthiness and income to determine the amount of the loan and what terms they are willing to offer based on the credit report.
You will then make consistent monthly payments on the loan until the date it will be paid off. It is possible to save some interest by paying off the loan early, but some lenders require a prepayment penalty, so that will need to be discussed at the loan signing.
Advantages and Disadvantages
Installment loans have the ability to be extremely flexible, as well as being tailored to your specific needs. This type of loan allows you to obtain financing for a large purchase at a lower interest rate than a credit card can offer.
For a long-term loan, one disadvantage may be the fact that you are making payments on a loan with an interest rate that is higher than the current market rate. If you have a credit score to allow this, you may be able to refinance your loan to get the lower interest rate.
The other disadvantage of an installment loan is being stuck in a long-term financial commitment. You can face some kind of financial hardship making it impossible for you to continue making your loan payments as scheduled. This puts you in danger of defaulting on the loan and having to forfeit any collateral used to secure the loan.
Where to Find an Installment Loan
There are a few different places to find an installment loan. You can look at a traditional bank, maybe the bank you handle your other finances with. You can also look for a credit union and an online lender as well.
If you are going to go with a traditional bank, you’ll want to check what kind of fees are associated with the loan. You will also want to try to get the lowest interest rate possible.
If you are considering a credit union, you will need to keep in mind that most of the time you will need to pay to become a member of the establishment before they will extend a loan to you. Some credit unions will have specific eligibilty requirements for their members, so you will want to be aware of that ahead of time.
Online lenders are convenient options, as you can apply for a loan without even leaving your home. Most online companies will only run a soft hit on your credit to check your eligibilty. Online lenders also release your funds quicker than the other options.