Installment Loans 101: Everything You Need to Know
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Trying to find money to pay for larger expenses? One of the most common loan options, an installment loan, might be right for you. Installment loans come in many varieties, such as mortgages, personal loans and auto loans. That means you have lots of options to choose from when trying to find a financial solution that fits your budget and lifestyle.
Here’s what you need to know about installment loans when deciding if getting one is best for your finances.
- What is an installment loan?
- 4 common types of installment loans
- Where to find installment loans
- Comparing installment loans
What is an installment loan?
An installment loan is any kind of loan where you receive the money in one lump sum and agree to make pre-determined monthly payments over a fixed term until you’ve repaid the debt. Unlike credit cards, installment loans have a definitive end date. So, if you keep up with the monthly payments, you’ll be able to know in advance when you’ll fully repay the loan.
The difference between most installment loans usually comes down to the collateral you use to secure the loan. For example, if you take out a mortgage your collateral would be the property, whereas an auto loan secures the debt against your car. An exception would be unsecured personal loans, where you give the lender no collateral and rely on the strength of your credit score to obtain a favorable interest rate.
Most of the time, regardless of what type of installment loan you’re trying for, a lender will look at your credit score to determine if they’ll lend you money and what your interest rate will be. They could also ask for information about your income and work history. If you have poor credit and are struggling to qualify for a loan, you could consider credit repair services. These types of services could help you repair damaged credit so you can qualify for a loan.
4 common types of installment loans
Depending on how much money you need and what you’ll use it for, there are four main types of installment loans you might consider.
A mortgage is a personal loan that uses property you own as collateral. There are many different types of mortgages, but there are some common features of a mortgage that you can use to compare which loan would be right for you:
- Term length: Typical term lengths for mortgages are 15 or 30 years, although it could be possible to negotiate a different term length. With a shorter term you’ll pay more monthly and pay less over the life of the loan. Stretching your mortgage out longer reduces your monthly payments, but does make the overall loan more expensive.
- Fixed or adjustable rate: A fixed-rate mortgage is where the interest is locked in at the beginning of the loan and doesn’t change over time. This means you’ll always know how much you owe monthly, but generally the rate tends to be higher. With an adjustable-rate mortgage, after an initial period where the interest rate is fixed, it can then increase or decrease depending on the market.
Personal loans can be used to pay for almost any expense. A common use of personal unsecured loans is debt consolidation. Because installment loans (personal loans) have a definitive end date, consumers who are having difficulty paying off all their debt can consolidate it into one loan — paying off all their other forms of debt — and make payments on the new loan until they are debt-free. This can be particularly helpful if interest rates on your other debts are high, which is often true of credit card debt. Qualifying for a personal loan with a lower interest rate could help you pay off debt sooner.
An auto loan uses a vehicle as security against the sum of the loan. Like other installment loans, you’ll have to decide what monthly payments you can afford and how long you’ll want to be in debt for before getting an auto loan. It’s a good idea to check your credit score before shopping for auto loans so you’ll have an estimate of what rates you should be able to qualify for. Compare lenders online to get your best rate before making a final decision.
If you’re trying to go to school and need some extra funds to cover your costs, you can apply for both federal and private student loans.
Federal student loans are granted through the government and may have benefits such as fixed rates and income driven repayment plans. You don’t need to start repaying the loan until you’re out of school. Private student loans are approved through financial institutions such as banks and credit unions, as well as online lenders. Interest rates depend on your credit and could be variable or fixed. With some private student loans you’ll have to begin repaying the balance immediately, others could have the flexibility to defer payments until you’re out of school.
Where to find installment loans
It’s smart to compare rates at different lenders before you apply for a loan. Here’s where you can start your search.
Comparing rates from online lenders is something you can do from the comfort of your own home. When quoting you rates on many installment loans, online lenders will often do a soft credit pull to give you an estimated rate. That means comparing rates shouldn’t negatively impact your credit. A hard credit inquiry, which is viewed by the credit reporting agencies as an attempt to access more credit, could negatively impact your credit score. So, when you’re comparing online lenders, make sure each lender isn’t doing a separate hard credit inquiry to quote your rate.
If you have good credit, a traditional bank might be a great option for getting an installment loan. When checking rates, it’s smart to start with your personal bank first as they might give better interest rates to current customers. Since traditional banks often have many branches across the country, it could make it more convenient for you if you prefer to discuss the terms of your loan in person.
You’ll need to become a member of a credit union in order to access products such as loans, but some credit unions offer distinct advantages to their members. If you’re looking for a small-dollar, short-term loan, credit unions are able to offer you $200 to $1000 loans for terms between one and six months.
Comparing installment loans
No matter what type of installment loan you’re thinking of, there are similarities you can compare.
The APR is the cost of the loan, including the interest that you’d pay over the total life of the loan. Some lenders also include fees, such as an origination fee, in the APR. If you just compare interest rates you might get a false idea of the true cost of the loan, which is why it’s best to compare the APR of each loan you’re considering.
The term of your loan is significant because it will help determine your monthly payments and how expensive the loan will be in total. A shorter term loan will cost you less overall but you’ll have to pay more each month in order to repay it on time. A longer term loan lowers your monthly payments, but since you’ll be paying interest over a longer period, it actually increases the cost of the loan.
Early repayment fee
Some loans levy a fee against you if you repay them early. If it’s a goal of yours to repay the loan before its term ends, you’ll want to make sure this won’t cost you extra.
Flexible payment dates
Life can be unpredictable and it’s possible you could find yourself unable to repay your loan on the same date each month. While some loans allow you to change your payment date or provide a grace period each month, others are firm about your monthly timeline. While this might not be your driving factor in choosing a lender, it could be a valuable consideration.