Education News Simulator Your Money Advisors Academy Table of Contents What is an installment loan? The types of Installment Loans Secured vs. Unsecured Installment Loans How to apply for an Installment Loan Advantages and Disadvantages Installment Credit Scores and Loans The Bottom Line Credit & Debt Buy Now and Pay Later How Installment Loans Function Flexible terms and lower rates are part of installment loan benefits This is by J.B. Maverick Updated on May 20, 2022. Reviewed by Thomas Brock Truth checked by Ryan eichler A “installment loan” is a broad term used to describe the large majority of personal and commercial loans that are offered to borrowers. Installment loans are any loan which is repayable with regularly scheduled payments or installments. If you are thinking about using an installment loan there are pros and cons that you must consider first. Here’s the information you need to know before taking out an installment loan. What are the most important lessons to take away Installment loans are commercial or personal loans that the borrower must pay back in regular, scheduled payments or installments. For each installment installment, the borrower repays a portion of the principal loaned and additionally pays fee for the loan. Some examples of types of loans can include car loans as well as mortgage loans as well as personal loans and student loans. The advantages for repayment loans can include flexible loan terms and lower costs of interest. The drawbacks of installment loans include the possibility of the loan being in default and losing collateral. What is an installment loan? An installment loan will provide the borrower with the option of a predetermined amount to be repaid by regularly scheduled installments. Each installment loan requires repayment of a percentage of the principal amount borrowed as well as the payment of interest on the debt. The principal factors that determine the total amount each regular loan payment are the amount of the loan along with the interest rate applicable to the borrower and the duration of the loan. The regular amount for payment normally due monthly remains the same for the entire loan term, making it simple for the borrower to budget ahead in order to make required payments. Borrowers generally have to pay other fees in addition to interest charges like processing fees on applications, loan origination fees, as well as other fees like late-payment fees. Different kinds of installment loans The most popular types of installment loans include auto loans and mortgage loans or personal loans, and student loans. Other than mortgage loans which can be variable-rate loans where the interest rate changes during the period of the loan Most loan installment loans comprise fixed rate loans which means the price of interest for all the duration of the loan is set in the moment of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are secured by the property the loan will be used to purchase. The primary collateral in an auto loan is the vehicle that is bought with the loan. Some installment loans (often referred to as personal loans) are granted without collateral being required. Loans extended without the necessity of collateral will be granted based on the creditworthiness of the borrower, usually demonstrated through a credit score, or the ability to repay , as proven by the borrower’s earnings and assets. The rate of interest on an unsecured loan is typically higher than the rate that would be the case for a similar secured loan that reflects the higher risk of not being able to repay the creditor accepts.1 If you’re looking to take out an installment loan You might want to look into a personal loan calculator to determine the kind of interest rate you’ll enough to afford. The process of applying for an installment loan A borrower seeks an installment loan by applying to one of the lenders, usually with the purpose of the loan one example is financing the purchase of a vehicle. The lender will discuss with the borrower numerous options concerning issues such as down payment as well as the duration of the loan, the payment schedule and the payment amount. If a person wishes to borrow $10,000 in order to finance purchases of car like a car, for example, the lender informs him that making a larger down payment could lead to a lower interest rate, or the borrower might have lower monthly installments by making the loan to a more long-term. The lender also evaluates the creditworthiness of the applicant to determine the amount of credit they will grant and the loan conditions they are willing to offer. The borrower ordinarily retires on the loan in the form of necessary payments. In most cases, borrowers can avoid the cost of interest by repaying the loan before the expiration date of the period specified on the loan agreement. Some loans come with penalties for prepayments if an applicant pays off their loan in advance. Advantages and disadvantages Installment loans are flexible and can be personalized to the borrower’s wants in regards to the loan amount and the length duration that is best suited to the borrower’s ability to repay the loan. These loans can allow the borrower financing with a much lower interest rate than what is usually available with credit financing with revolving nature which includes credit cards. This way, the lender has more cash on the bank to be used for other purposes, as opposed to making an outlay of cash that is large. Pros Financing big purchases Amount of payment typically remains the same throughout the loan period It is typically possible to lower the cost of interest by repaying your loan early Cons Loan fees can be costly. Credit can be damaged because of missed or late payments Possibility of borrowing more than needed For longer-term loans it is possible that the borrower could be paying interest on a fixed rate loan at a more expensive interest amount than the market rate. The borrower may be able to refinance the loan at the less-interest rate. The second major drawback of an installment loan results from the borrower getting locked into a permanent financial commitment. Sometimes, the circumstances may render the borrower incapable of paying the monthly payments, risking default, and the possibility of losing any collateral used to guarantee the loan. Installment Loans and Credit Scores The ability to pay off an installment loan promptly can help you increase your credit score. History of payments is the most significant factor in your credit score. A steady track record of good borrowing is good for your credit rating.2 As I mentioned before, your credit score may take a hit if you don’t make timely payments or if you fail to pay the loan. This can be a red flag in lender’s eyes. The Bottom Line An installment loan could help you finance big purchases, for example, a car or your home. Like any loan, there are advantages and disadvantages to take into consideration. Benefits include flexible terms and lower interest rates, but one of the biggest drawbacks is danger of default. If you’re considering taking for an installment loan take the time to examine rates and terms offered by lenders before signing your signature on the dotted lines. Article Sources Related Articles Man looking over papers Personal Credit Payday Loans Compare. Personal Loans What’s the difference? Small red home with money coming out of it with the look of tape from a dispenser, being sat on a fan that holds $100 bills. Home Equity HELOC vs. Home Equity Loan. 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Types, their workings, and Examples A mortgage is an loan intended to purchase or maintain real estate. more The meaning of default What Does It Mean, What Happens If You fail to pay, Examples A default occurs when a debtor fails to make payments that are required for a delinquent debt, whether interest or principal. More What is an Amortization Schedule? What Calculation Methods Can You Use With Formula An amortization schedule can be described as a complete schedule of periodic blended loan installments that show the principal amount and the amount of interest. more
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