What is an installment loan? a fixed amount repaid over time
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- An installment loan is a specific amount of borrowed money that is repaid in fixed monthly payments over time.
- Mortgages, auto loans, personal loans, and student loans are some common examples of installment loans.
- When shopping for an installment loan, you should pay attention to repayment terms and any origination fees in addition to the interest rate.
- Learn more about personal finance coverage.
When consumers need to borrow money, they have two main options: revolving credit or an installment loan. Each type of loan product has its own set of advantages and disadvantages.
Revolving lines of credit, like credit cards, can be a good way to pay off small loan amounts that you expect to pay off in a short period of time. But if you want to borrow a large sum of money and want to pay it back in fixed amounts over a longer period of time, an installment loan will be more suitable.
In this article, we’ll look at the different types of installment loans, how to get them, and when they might suit your borrowing needs. Here’s what you need to know about installment loans.
What is an installment loan?
An installment loan is a specific amount of borrowed money that is repaid in fixed monthly payments over time. Interest is included in the payments and the time it takes to fully repay the loan (the term) can range from a few months to 30 years.
Many of the loans consumers are most familiar with are installment loans. Here are some examples:
Point-of-sale financing offers and âno credit checkâ emergency loans are often also set up as installment loans.
How to get an installment loan
You can apply for an installment loan from any bank or credit union. You can also check out online lenders like light stream, SoFi, Before, or others.
In some cases, you may be able to take out an installment loan directly from the company you purchase a product from, such as your car dealership or furniture store.
Finally, borrowers can take out short-term emergency installment loans. Payday loan stores are among the most notorious places for borrowers to get emergency cash. Payday loans can be incredibly expensive, often charging interest rates of 400% or more.
If you need emergency money, first consider applying for an alternative payday loan (PAL) from your local credit union. PALs cap interest rates at 28% and never charge more than $20 in fees.
What to look for in an installment loan
The first thing you will want to consider with an installment loan is the interest rate that is offered to you. Be sure to check if the rate is fixed or variable. You may be able to get a lower initial rate with an adjustable rate loan, but that rate could also increase over time.
If you plan to pay off your loan quickly, an adjustable rate installment loan could save you money. But if you have to repay for several years, locking in your interest rate with a fixed rate loan may be the best solution.
Next, check the origination fees (if any) charged by the lender. Often the origination fee is a fixed percentage of the loan amount. But short-term loans may charge a fixed fee instead. Shop around to try and find lenders who charge reasonable fees, or preferably none.
Finally, you will want to consider the length of tenure. In general, the longer the term, the more interest you will pay. But a longer term will also usually mean lower payments. If you’re looking to save as much money as possible, try choosing a shorter term. But if monthly cash flow is your top priority, a longer term might make sense.
How to save money on an installment loan
The interest rate offered to you on an installment loan will be based, in part, on your credit score. Improving your credit score before you apply is therefore one of the best ways to save money on an installment loan.
How can you improve your credit rating? Making payment on all your credit accounts on time is a good start. And lowering your credit utilization rate could also give your score a quick boost. Also, periodically check your credit report for errors. If you find any, be sure to fix them before applying for an installment loan.
Another potential way to get better rates on installment loans is to improve your debt-to-income ratio. For example, paying off your credit cards or paying off your car loan before applying for a mortgage could make a difference in the rate you are offered.
Finally, one of the easiest ways to save money on an installment loan is to simply pay it off faster. Although installment loans have fixed monthly payments, most lenders will allow you to pay extra whenever you want. By paying off your loan sooner than expected, you could save several months or years of interest on the loan.
Is the installment loan for you?
If you like the idea of ââbeing able to know exactly when your loan will be paid off, an installment loan might be right up your alley. And because they usually come with predictable monthly payments, installment loans can be easier to budget for.
However, flexibility is one area where installment loans fall short. Once the funds are disbursed, you can no longer borrow against an installment loan. So if you’re not sure how much money you’ll need, a revolving line of credit may be a better option.
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