What Is a Personal Installment Loan
Any loan paid back in fixed installments is called an “installment” loan. This category includes personal, auto, and student loans and mortgages.
Banks often offer such products to borrowers to buy expensive items, pay for travel and wedding expenses, or even pay off medical payments. The purposes of installment loans are unlimited as long as they are legal.
If you are considering getting an installment personal loan from a financial institution, you need to determine which type is best for you and learn the pros and cons of each option. We will talk about this and much more in this article.
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What Is Installment Loan?
When you borrow a sum of money, usually $500 or more, and pay it off over several months or years in fixed payments, you take out an installment personal loan.
The main characteristics of this type of borrowing are:
- It’s a closed-end loan, which means the bank gives you the total amount immediately after you sign the contract.
- Usually, you know the number and exact amount of payments before you sign the contract.
- Such a loan can range from a few hundred dollars to $500,000. If it is a personal loan rather than a mortgage, the amount usually does not exceed $100,000.
- Installment loans are available to all categories of borrowers, even those with a bad credit score.
The purpose of your loan can be anything except buying guns, drugs, and other illegal substances. Sometimes banks refuse to lend funds to start or grow a business, but installment loans generally can be used for this purpose.
How Do Installment Loans Work?
Imagine that you have just signed an agreement with a financial organization to obtain an installment loan. What’s next?
- First, within 1-7 days, the company will send the funds to your bank account or give them to you in cash. You will get the total amount at once, except for some fees (for example, personal loans have an origination fee of 1% to 10%). Interest will be added to the loan amount, and then the total will be divided by the number of months to arrive at your payment.
- You must make the first payment 30 days after signing the contract. You will know the amount and date of the payment in advance when you sign the contract. Usually, the financial organization specifies each payment, its amount, and its date.
- You can pay off the loan gradually with fixed payments, as specified in the contract. However, you can also pay it off early. Banks often do not charge prepayment penalties for this decision.
When you pay off your last payment, the loan is permanently closed. A note about this appears on your credit report if the bank reports to the credit bureaus.
Types Of Installment Loans
There are several types of them, each of which has its features, pros, and cons. Depending on your purpose and preferences, you can choose any of them. Read the descriptions of each option below to find out which is best for you.
Personal loans are the most popular form of installment credit. They can be obtained from a bank or online lenders, and the amount of borrowing will range from $1,000 to $100,000.
The main advantages of this option are:
- The ability to use the funds for any legitimate purpose.
- Low APR of up to 36%.
- The average payment period is from 2 to 7 years.
- Accessibility even for people with low credit scores.
- The ability to get a loan even online.
- Ability to choose between secured and unsecured options.
- Usually, funds are credited to your account within 1-7 days.
- Almost all banks and financial institutions provide this type of borrowing.
Its only significant disadvantage is the 1% – 10% origination fee. Only some lenders on the market operate without this fee.
A mortgage is a secured installment loan in which your home is the collateral. Financial institutions lend you cash to buy or maintain a house, land, or other property. If you do not pay back the money on time, the lender has the right to take the house as collateral and sell it to cover their costs.
To get a mortgage, you must have a certain income level, stable employment, and a minimum credit score. In addition, the peculiarity of this type of borrowing is that you will need to make a down payment of up to 20% of the price of the house to get it.
Of the advantages of this option, we can highlight the following:
- For many families, the mortgage is the only way to buy their home.
- Financial institutions provide mortgages for up to 30 years, which allows you to pay them off with small monthly payments.
- Depending on your needs and possibilities, you can choose from several types of mortgages.
- If you have a low credit score, you can enroll in one of the many government programs that help Americans buy their first home.
Although mortgages have low-interest rates of up to 15%, over 10, 20, or 30 years you will pay back enough to buy several houses. It means you pay back many times more than you borrowed, which is a disadvantage.
It should also be noted that mortgages have various fees, such as arrangement or valuation fees. In addition, if you decide to pay back your borrowed funds early, you may face an early payment penalty.
And of course, the most significant disadvantage of this option is that if you don’t pay the loan on time, you will lose your home.
Car loans are also usually payable in fixed installments over a set period. They are very similar to personal ones, the only difference being the lower rate and the ability to borrow money from the dealer.
You can also apply for an auto loan from a credit union, bank, or online lender. You do not have to make a down payment; the interests are legally required to be no more than 16%.
Of course, it is essential to remember that the car you buy will be the bank’s property until the loan is paid in full. If suddenly you can’t pay back the borrowed funds on time, the financial institution can sell it and cover its costs.
In addition, it is essential to understand that despite the low APR, auto loans can be expensive because of various additional fees. Therefore, choose the lenders with the best terms and conditions, and you can get the most out of this type of borrowing.
A student loan allows you to pay for university or college tuition, living expenses for that period, and other extra costs for your education. Many students take advantage of federal loans, which have lower interest rates and are available even to those with low credit scores. However, this option has a significant disadvantage because the loan amount is small.
For example, at some universities, a semester of tuition costs $40,000, while federal student loans can generally not exceed that amount.
Of course, students can borrow more money from private organizations, but they must meet specific criteria. For example, many companies work only with students in promising majors, such as engineering. In addition, they impose credit rating requirements and do not always allow you to borrow with a co-signer, which is a severe disadvantage of this option.
Pros And Cons Of Installment Loans
You can see all the advantages and disadvantages of this type of borrowing below.
You can get such a loan even with a bad credit score. In extreme cases, you may be able to borrow money secured by real estate or other property.
Interest rates are tied to the borrower’s credit rating and income level, so sometimes, getting such a loan on favorable terms will be unrealistic.
You can borrow hundreds of thousands of dollars and have an interest rate of no more than 36%.
This type of borrowing can have many different fees, up to 13% of the loan amount.
This type of borrowing is outstanding for building credit history because on-time monthly payments account for 35% of your FICO score.
You may miscalculate the needed amount, causing you to take out another loan. This is common when borrowers do not consider all the costs or unpredictable expenses, and the loan amount is insufficient for everything. In this case, a credit card has more advantages.
You can plan all your monthly payments in advance and not worry that the interest will increase over time.
You will be able to use the borrowed funds for any legitimate purpose.
Even if you want to start or grow a business, you can find a lender willing to give you an installment loan.
How To Apply For A Personal Loan
To get a personal loan, you can follow the following plan:
- Calculate how much money you need to borrow and the affordable monthly payment.
This step is the first, as you need to know exactly how much you need to choose the right lender. Each company has its rules, so if you need $50,000, you may not be interested in those who provide loans between $1,000 and $5,000.
- Choose the right lender.
Before you sign a contract with a particular financial institution, look at several offers from different lenders to see what APR, amount, and repayment period you can count on. Try to choose companies that conduct soft credit checks.
- Gather all the necessary documents.
You must provide proof of your identity, income, place of residence and official employment, and Social Security number to get an installment personal loan. The lender will also check your credit score, indicating your borrower’s reliability.
- Submit your application.
You can do this online if the lender has a website or go to one of their branches in your city. Remember to provide all the documents listed above with your application.
- Read the contract carefully before you sign it.
Pay attention to the final price of the loan, the interest rates in the contract, and whether there are late or prepayment penalties. Be sure to read the entire agreement before you sign it.
Lenders usually send money to your bank account within 1-7 days if you have an unsecured installment loan. The time may be longer if you have a mortgage or auto loan.
Who Should Get an Installment Loan
Installment loans are a simple and predictable type of borrowing that suits many borrowers. For example, if you have wanted to make a big purchase for a long time, you can borrow money from the bank so that you don’t have to put it off for several years.
In addition, installment loans are often the only way to buy a house or a car. In this situation, you can also use this type of loan if your income allows you to make monthly payments on time.
In general, you should only refrain from such loans if you are in one of the following situations:
- You don’t have steady employment or a stable job.
- You already have a lot of debt that you have a hard time paying off.
- You have a low credit score.
- You are unsure if you can repay the loan on time.
In addition, many borrowers have taken installment loans too often because they have become very affordable – now, you can even borrow cash from your phone in a few hours. However, we want to emphasize that credit is a responsibility, so you should not borrow funds unless you urgently need it. Otherwise, overspending and unhealthy financial habits will lead you into a debt trap.
What Installment Loans To Avoid
Explain what installment loans the user should avoid (high APR, scammers, short repayment terms, etc.).
Since such loans are available even online, many scammers have appeared on the Internet, who attract customers to lucrative but implausible offers. Try not to take a loan from a company that does the following:
- Offers you an installment loan with an APR above 36%. This level is set by law, so any company offering personal or auto loans with higher APR is illegal.
- Promises a loan with 100% guaranteed approval even before you submit your documents. Only crooks do that.
- Asks you to pay some fees before signing the contract and transferring the loan funds to your account. This is not a regular practice for legal financial organizations.
Also, avoid installment loans with very short payment terms (up to 3 months), as banks usually give them for one to 10 years.
Do Installment Loans Hurt Credit Scores?
Many borrowers are concerned about their credit rating dropping after getting a new loan. Why does this happen, and will it be like this after getting an installment loan? Yes, it will happen anyway because:
- Getting new credit shows up on your credit report and can worsen your credit score briefly.
- When you get new credit, your debt-to-income ratio increases, as does your credit utilization ratio. These two have a direct impact on your score.
However, you don’t have to worry about the decrease in your FICO score because it is temporary. If you make all of your loan payments on time, you will see an increase in your credit score within 6-12 months.
In addition, financial organizations look closely at your payment history when deciding whether to give you a new loan, so paying installment loans on time is a great way to build a positive credit history.
Where To Find Installment Loans
As we said, you can get a loan from various financial institutions. Let’s discuss the most popular and affordable options:
Many banks offer unsecured installment loans, and their interest rates are lower than those of many online lenders. However, you have to consider that banks have stricter requirements for borrowers. Therefore, this option may be best for you if you have a good or excellent credit score.
- Credit unions
If you are a member of one of the credit unions, you can get installment loans with the lowest possible interest rate, even if you do not have a good credit rating. In addition, these financial institutions usually evaluate your credit history and many other indicators when deciding on a loan, which is a significant plus.
However, it is essential to remember that only those who fit the organization’s criteria can get into a credit union.
- Online lenders
Today, there are dozens of reliable companies on the Internet that serve as many customers as small American banks. Not only can you borrow cash from them to buy a new phone or even a car, but you can also get a mortgage if you fit the criteria.
This option is excellent for people with low credit scores, as many financial organizations working online allow you to pre-qualify and determine your loan terms without hard credit checks. In addition, these institutions often have lower requirements for borrowers and even lend funds to people without regular employment.
Their only drawback is less favorable terms. So, you can borrow cash from online companies faster but for a shorter period and at a higher APR.
Installment Loans For Bad Credit
Installment loans are good because they are affordable even for people with low FICO scores from 350 to 600 points. However, it is essential to remember that the interests will be much higher because it is tied to your credit score.
Many financial institutions are willing to work with this category of borrowers, but not all are willing to give them unsecured installment loans. In this situation, you can pledge some of your property and get a loan at a lower interest rates for a more extended time.
Despite the popularity of such loans, you should not use them if you do not have a stable income or official employment. In this situation, it won’t be easy to repay on time; even one missed payment can destroy your credit score.
If you want an installment loan but realize you have a low credit score, you can pay off some existing loans, open a new credit card, or improve it in other ways. That way, you’ll have more FICO points in 6 months and be able to get a better loan.
Alternatives To Installment Loans
If for some reason, this type of borrowing does not suit you, you can use alternative options. We have described some of them below.
Personal Lines Of Credit
A PLOC is your agreement with a financial institution that, for a certain amount of time (for example, five years), you will be able to use a certain amount of cash (for example, $10,000). This is a revolving type of credit, meaning that every time you repay your debt, you can borrow some amount from that ten thousand again.
The principle of a personal line of credit is similar to that of a credit card because you can also pay interest only when you roll over your balance from month to month.
This option has the following advantages:
- You will have quick access to the funds for a specified period.
- You won’t need to take out a new loan whenever you need to borrow cash before your paycheck.
- You can only pay interest when you use credit funds.
At the same time, however, this option has a higher interest rate and additional fees and can be difficult for people with poor financial habits. Therefore, you should only use it if you can pay back the borrowed funds as soon as possible; otherwise, the high interest rates will lead you into a debt trap.
If your only purpose for obtaining an installment loan is to build a credit history, you can use a better alternative. Credit-builder loans do not allow you to use your credit until you have paid all of the interest and the loan itself, but they will enable you to build good credit through a positive payment history.
The main advantage of this option is that you can use it to improve your FICO score and qualify for a better car loan or mortgage.
However, this loan will not help those who need cash to buy something. Also, remember that such products often have extra fees, so sometimes getting a regular personal loan is more advantageous to build your credit history.
Payday Alternative Loans
You can use payday loans if you have a meager credit score or only need to borrow a few hundred dollars before your paycheck. These are small loans of up to $500 for 2 to 4 weeks at an interest rates of up to 800%.
Their advantages, compared to installment loans, are as follows:
- Getting such a loan is much easier, as such lenders have less stringent requirements on borrowers’ income and credit rating.
- You will be able to receive funds in your account within one or two days after signing the contract.
- This is one of the few opportunities to borrow a small amount of funds for a few weeks.
- It is an unsecured loan, which means you will not need to provide your property as collateral.
However, it is crucial to understand that this is the most expensive type of loan because the interest on payday loans can be as high as 800% or even more. In addition, they need to be paid back quickly, within 2-4 weeks, which is not always possible, especially if you are in a difficult financial situation. Payday loans are generally considered predatory and could lead to a debt trap.
Is it good to have an installment loan?
The answer to this question depends on your goal. A credit-builder loan might be a better option if you need to build a credit history. If you want to buy something you don’t have enough cash for now, an installment loan might be a great option.
Is an installment loan better than a payday loan?
Yes, because installment loans have a low interest rate, a more extended repayment period, and allow you to borrow a large amount of money. At the same time, not everyone can get such a loan, and payday loan lenders are usually willing to work with all borrowers.
How much can I borrow with an installment personal loan?
You can expect to borrow between $500 and $100,000 if you borrow cash from an online lender. However, banks or credit unions can lend you more, from $1,000 to $200,000.
Is it hard to get an installment loan with bad credit?
You can get an installment loan with bad credit, as many online companies are willing to work with this category of borrowers. However, you must be prepared to get a loan on less favorable terms with a high interest rates and a short repayment period.
Can I get more than one installment loan at the same time?
No maximum number of installment loans is allowed by law, so you can have as many as you want. However, it is essential to understand that financial organizations see all of your debts, so, at some point, your debt-to-income ratio will be so high that they will stop lending you money.
Where is it better to get a personal loan?
Applying for a personal loan from a bank or credit union is best if you have a good credit score and want to borrow money on the best terms with a low APR. However, if you need money urgently, you should go to online lenders.