Installment loans are offered to individuals who want to borrow a large sum of money that will be divided within a specific term where the borrower can repay over time. It often involves a fixed interest rate and is needed to be paid monthly until full payment.
Many borrowers opt for installment loans when financing for emergency expenses. Installment loan terms will be clearly stated in the contract, like the interest rate, loan term, and possible penalties for late or non-payment.
Examples of Installment Loans
Some loans are on an installment basis. Most borrowers prefer loans that they can repay in small, affordable portions instead of a bigger, one-time payment.
Below are some loan options you might want to get as an installment basis loan.
Auto Loans
Auto loans are one of the most common installment loans. Individuals who want to own a new vehicle but cannot afford to pay it in cash tend to resort to car loans due to its installment basis. By acquiring a car loan, you can purchase and get hold of the vehicle even without a large amount of money.
An auto loan term typically ranges from 12 to 96 months. However, it still depends on the lender if they allow the loan term to go beyond 96 months or below 12 months. Remember, loan terms, penalties, and interest rates vary from one lender to another.
Mortgage
Individuals who want to purchase a property but could not afford to pay it in cash acquire a mortgage. This is to aid them in their home purchase. The typical term of a mortgage ranges from 15 to 30 years.
Usually, a mortgage interest rate is fixed and will not change over time. This means that the borrower’s monthly payment won’t change, except if there’s a penalty due to late payments. You have to be punctual in paying your loan to avoid additional charges, such as penalties.
Personal Loan
Borrowers acquire personal loans for various reasons. They can be used for purchasing goods, paying bills, or for medical emergencies. Personal loans typically have a term of 12 to 96 months. They have a higher interest rate, especially if you acquire an installment loan from a bad credit direct lender.
Having bad credit will put you at the risk of having to pay a higher than the normal interest rate. Moreover, an unsecured personal loan does not require collateral. Hence, lenders impose higher interest rates.
The Advantages of an Installment Loan
Installment loans appeal to borrowers due to the advantages they possess. Alternative options, such as payday loans, require a one-time payment of the principal amount, including the interest rate.
Here is the list of advantages of an installment loan you can enjoy.
Predictable Monthly Payments
As mentioned earlier, installment loans have a fixed interest rate, which means that your monthly payment is always the same. Borrowers are attracted to loans that offer fixed rates as they do not need to worry about the increase in interest rate.
Low Monthly Payments
Installment loan comes with an extended loan term that allows for small monthly payment. The longer the payment term of a loan, the easier the borrower can pay the loan. Even in personal loans who imposed higher interest rates, the borrower won’t even notice it as the principal amount is distributed through the loan term.
Releases Money Fast
Cash will be released in less than two weeks. Therefore, the borrower will take hold of the money and can use it sooner. Requirements for installment loans are also lenient. Lenders do not request a lot of documents from the applicant during the application process for an installment loan.
Two Types of Installment Loans
There are two types of installment loans: secured and unsecured.
Secured loans are loans that require collateral as security for the loan. Collateral can be an asset the borrower owns, such as properties or vehicles, that the lender can repossess when the borrower fails to pay the loan.
Unsecured loans are those loans that do not require any collateral. The lender will only rely on the borrower’s creditworthiness instead of demanding collateral. A borrower must have a high credit score to qualify for an unsecured loan.
In the event of a default, the lender tasks a collection agency to collect the borrower’s payment. Their other option is to bring the matter into court to demand the money. Hence, it is best to pay your monthly payment on time to avoid such inconvenience.
The most common examples of unsecured loans are credit cards, personal loans, and student loans. If you plan to acquire one of these loans, you should have a high credit score or a guarantor as these are non-collateralized loans.
Takeaway
It is important that you know all about installment loans before you acquire one. This helps you know what to expect and what your options are. Though most of the loans are installment basis, it is still vital that you are familiar and aware of what you are getting into.