Are you looking to buy a new car? Or maybe you’re planning to purchase a bigger house? Chances are, you will likely have to acquire them through a loan.
Essentially, these loans come in the form of installment loans. But what is an installment loan?
Research revealed that around 10 million Americans apply for installment loans every year. The loans range between $100 and $10,000. Sometimes, they can even go higher.
As for the fees and interest, borrowers spend over $10 billion annually.
You may wonder if all these fees are worth it. Before you apply for a loan, you must first understand how it works. You also need to prepare accordingly to increase the chances of approval.
Continue reading below as we dig deep into installment loans and how they can work to your advantage.
What Is an Installment Loan?
Before applying for a personal installment loan, you need to look at the bigger picture. You need to understand how it works. So what is an installment loan?
These are loans that involve any amount of money. It involves a principal amount and a fixed interest rate. Typically, you pay off the loan on a monthly basis with an interest rate in effect.
One of the factors that make installments loans a favorite is flexibility. You can use these loans for practically any purpose.
Furthermore, there are two categories of installment loans: collateralized and non-collateralized. Auto loans and mortgages involve collaterals in the form of the car or house.
As for the non-collateralized type, you can expect them to come with higher interest rates.
The Different Types
As we mentioned earlier, you can use installment loans for various purposes. Hence, there are different types of installment loans you can apply for.
First, there is the personal loan. Generally, credit unions, online lenders, and banks offer this type of loan.
Most borrowers apply for personal loans to consolidate their debt. This means combining several old debts into a new one. This new debt comes with a lower interest rate that makes payments more manageable.
Personal loans come with interest rates that range from 6% to 36%. The terms, on the other hand, play around the two to five-year range.
Next, there are home loans or more popularly known as the mortgage. The payment terms can be 15 or 30 years. The lenders may also offer a fixed or adjustable interest rate.
There are also auto loans. The interest rates range between 3% and 15%. You can apply for a car loan from dealerships, banks, and credit unions.
Lastly, there are the no-credit-check loans. These loans do not require any credit checks. But the downside is that they come with soaring fees and interest rates.
Be wary of this type of loan. Make sure to carefully examine your options before applying for one.
The Pros
We mentioned earlier that installment loans offer flexibility. Now let’s try to break down the details as we tackle the advantages they offer. First, installment loans offer stable interest rates compared to other types of loans.
This is because most installment loans come with fixed rates. You don’t need to worry if the interest rates go up.
Another is the option to pay long-term. You can work out a deal with the lender to come up with a payment schedule that suits your current financial capabilities.
Installment loans are also predictable. This means you already have an idea of how much you are going to pay every month. This gives you flexibility when it comes to managing your budget.
If you wish to finish off your debts faster, you may also opt for shorter payment terms. When it comes to your application, installment loans don’t involve long waiting times. You will find out if your application is a go in just a few days.
The Cons
There are also some disadvantages to consider before applying for an installment loan. First, failure to pay the loans may result in the seizure of your collateral. This means the bank can take away your car if you fail to pay the loan in a given number of months.
You need to settle the monthly payments regardless of your current financial situation.
Another disadvantage is when the interest rates decrease. Since installment loans come with fixed interest rates, your loan’s current interest rate will remain the same no matter what.
Last but not least, there are lenders who are guilty of predatory practices. What these lenders do is they offer fast-cash installments to borrowers with poor credit scores. What the borrowers don’t know is that there are surprise charges and steep borrowing fees waiting.
Thus, you need to make sure you read the contract carefully before signing. Keep in mind that once you sign on the dotted line, you can no longer renegotiate the terms of the deal.
Tips for Easy Approval
When it comes to your application, the ideal scenario is securing quick approval. Now there are online installment loans that offer instant approval. As for the traditional installment loans, approvals may take a couple of days.
Regardless of your application, there are ways to help you secure approval. You need to focus on two things: your income and your credit score.
You need to make sure you can cover the payments with your current income. A mortgage should not go beyond 30% of your monthly income. Meanwhile, a car loan should only eat up around 20% of your monthly salary.
As for your credit score, you need to improve it first if you have a bad rating. Improve your score by paying down your credit card balances. You also need to ensure that your accounts stay current.
You may also consider applying for automatic payments. This will ensure that you are paying your debts on time. Once you hit the credit score of 720 or better, that’s the time you should apply for an installment loan.
Continue Improving Your Finances
Answering the question “what is an installment loan” is a huge step in attaining your goals. Understanding how loans work and preparing financially will reduce the stress on your part.
As for your other money-related concerns, you need to continue on improving your financial situation. We encourage you to read our other articles on personal finance. We discuss topics that will help improve your spending and build your wealth.