What is an installment loan?
An installment loan allows you to borrow a sum of money which you can bay pack over a period of time. It’s ideal for big-ticket purchases, but people get them for a variety of reasons – installment loans are flexible in terms of what you use the money for.
What are the benefits of installment loans?
Installment loans usually have lower interest rates than credit cards, and often much lower than payday loans. The ability to pay back the loan over time rather than as one lump sum is another attractive quality of installment loans.
Top reasons people get an unsecured personal loan
Keep in mind that the process of applying for an installment loan varies from lender to lender, but they generally follow this basic procedure:
- Collect personal identification and financial documents, such as social security number and proof of income.
- For prequalification, run a soft credit check – this won’t affect your credit score.
- Shop around and compare rates and terms from different lenders.
- Once you apply, run a hard credit check and verify your information.
- Obtain a decision on the loan. If you’re approved, you’ll normally get the funds fast – sometimes the next business day.
What can I use an installment loan for?
As we’ve mentioned before, installment loans are versatile in what they can be used for. Installment loans are essentially a type of personal loan, which can be used for a variety of purchases, including:
- Vehicles
- Real estate
- Debt consolidation
- Wedding costs
- Home renovation
- Emergency medical expenses
Types of installment loans
Installments loans are simply loans that can be paid over a period of time. They come in a few different varieties depending on the nature of the purchase.
Personal loan
A personal loan is straight-forward. It’s simply a lump-sum loan payment which is unsecured. This money can be used for whatever purpose you like.
Mortgage
A mortgage is a specialized secured loan which is used for the purchase of property, such as a house. The house serves as the collateral for the loan, making it secured. The amount of the loan is paid back over time, typically over several years (15-30).
Car loan
Another type of secured installment loan, a car loan is used to buy vehicles. It’s usually paid off on a monthly basis.
How to find the best installment loan rates
When you’re shopping around for an installment loan, you want to make sure you get the best interest rate. The type of rate you get will depend greatly on a few factors related to your credit and financial situation.
Here are a few tips to keep in mind during your search:
Check your credit report. You want to ensure there aren’t any errors. Late payments in particular could negatively affect your score.
Try to maintain a good credit score. Build your credit score by having a good amount of credit for a long time, paying on time, and having a good debt-to-income ratio.
Check out repayment terms. Choosing a shorter term will increase your monthly payment but will likely result in a lower interest rate. This is a good option if you can’t get a good interest rate because of your credit score.
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Installment Loans FAQ
Can I get an installment loan if I have bad credit?
It’s possible to get an installment loan with bad credit, but you need to do your research. Lenders vary considerably in terms of eligibility requirements, so you’ll encounter a lot of different options out there. In general, expect your loan to have a higher interest rate and more fees if your credit score isn’t great.
How does an installment loan affect my credit?
Just like any loan or credit card, ensuring you make your installment loan payments on time could improve your credit score. Payment history is a crucial factor in determining your score. Of course, keep in mind that having late or missed payments could negatively impact your score.
Paying off the loan in full can also improve your credit. However, when compared to paying it off over time, this won’t likely have a huge impact on your score.
Can I get a no-credit-check installment loan?
There are lenders that offer this, but keep in mind that obtaining financing from such a lender isn’t a good idea. This is typical of lenders that market themselves as “alternatives” to other fast loan sources such as payday loans. These are high-risk lenders, and their services will likely come with harsh fees and penalties. The loans you get from them will likely be smaller and have higher interest rates.
Can I use an installment loan for debt consolidation?
Yes, and in fact installment loans are a great choice for debt consolidation because they offer lower rates than credit cards.
How are installment loans different from payday loans?
Payday loans often charge high fees and come with severe restrictions and penalties. They are secured by your paycheck, and the lender can often get authorization to withdraw money directly from your bank account. They can send you into a cycle of debt that is difficult to get out of.
Can I have multiple installment loans?
Yes, and it’s fairly common. If you have a mortgage and a car loan, you’ve got two installment loans.
What happens if I default on an installment loan?
Just like any loan, if you default on an installment loan, you will negatively impact your credit score. This will signal to lenders that you are a riskier borrower. That means you won’t likely qualify for better interest rates and terms on future loans. If the loan you defaulted on was secured, the lender might be able to seize what you provided for collateral.