Many people come to a point in their lives when they need to look for loan options to consider. One loan type is called an installment loan. It is a loan that allows customers to borrow set amounts of money that will be repaid to the lender each month with fixed payments. These payments will include the interest for the entire loan and will depend on different factors, including your credit score, the size of the loan borrowed and the length of the repayment term.
Repayment terms for installment loans can range from a couple of months to over 30 years. Both unsecured and secured installment loans may be tied to collateral such as personal property. These types of loans differ from revolving credit (such as credit cards) because you will borrow a lump sum instead of a small amount over time from a line of credit.
The four most common installment loans are auto loans, mortgages, student loans and personal loans. Aside from mortgages and student loans, most installment loan products offer fixed interest rates and monthly payments that are the same each month. Some installment loans may be used for other purposes such as refinancing your auto loan or consolidating debts.
It is important to make educated decisions when comparing loan options. When it comes to installment loans, there are some basic pros and cons to consider.
When you get approved for an installment loan, the interest rate will always remain the same, even when changes in the market take place.
Installment loans are easier to budget for than others because payments will be the same each month and due on the same day.
Installment loans can help to diversify your mix of credit products. When you add a new or additional installment loan product, lenders will see that you are responsible for using different types of credit and can manage your budget effectively.
If you take out an installment loan and pay your monthly payments on time, you will see your credit score begin to rise.
Some lenders will charge prepayment or origination fees on their installment loans. It is best to ask a lender about potential fees before applying.
Depending on the installment loan lender you choose to apply with, the interest rate attached to the loan will depend on the credit scores of the borrower. Installment loans with high-interest rates significantly impact how much you pay on your loan.
When lenders feel borrowers will have trouble repaying a loan they offer, collateral may be necessary to get approval. Collateral is necessary to lessen the risk a lender takes when offering loans to borrowers with less-than-perfect credit.
Even though installment loans have their downsides, people with all credit ratings can find them to be useful. They can be a better option than payday loans that are riskier to apply for. Even though they seem appealing for short-term use, they have drawbacks as well.
Installment loans and credit cards are two of the most common ways people borrow money from lenders, but they're different in many ways. Below are some of the common differences to take into consideration.
Installment loans typically come with equal payments every month until the loan has been paid in full. With credit cards, on the other hand, monthly payments can vary significantly because of outstanding balances and daily compounded interest rates.
When borrowing money using an installment loan, the amount you borrow will be given to you in a lump sum. To add to the amount you borrow, you would have to fill out an additional credit application. Credit cards come with fixed credit lines, and the amount of credit you have available will be the difference between your limit and current balance. You may ask your lender to raise your credit limit if you are on good terms and have made your payments on time.
Installment loans often come with fixed interest rates that get locked into the life of your loan. Credit cards come with interest rates that can increase or decrease for many reasons such as the expiration of a promotional rate and late payments.
If an installment loan seems like the right product for you, consider using an online payment estimator to see how much you can afford to borrow. Before applying, check your credit score to avoid the risk of any surprises that may get you denied. Most lenders will require personal documents such as proof of residency, proof of identity, Social Security cards and proof of income. Always do some research on $500 loan lenders you are considering to ensure they are trustworthy. Websites like the BBB can give you insights that will help you choose the best lender for your loan needs.