An installment loan cannot be a household term. But if you take a closer look, you will realize that it is one of the most common types of loans. Most likely, you have already used it under another loan name.
If you borrow a certain amount of money that you have agreed to repay in a certain number of installments, it is called an installment loan. There are several types of installment loans with different loan amounts, interest rates, terms and repayment schedules.
Are you considering taking out an installment loan? Well, before you sign up, here’s what you need to know about installment loans.
Examples of installment loans
Installment loans vary in their purposes and terms. Take a look at this list of common types of installment loans.
Personal loans are used for different purposes, such as covering the cost of sudden expenses or consolidating debt. This type of loan usually has loan terms between 12 and 65 months, depending on the lender.
It does not require collateral, so a personal loan generally has higher interest rates than other types of loans. Credit unions, banks, and online lenders offer this type of loan.
Real estate or mortgage loans
Another example of an installment loan is a home loan or mortgage. It’s money you borrow to buy a house, and you can pay it back monthly over 15 or 30 years. There are government-sponsored loans, such as USDA and FDA home loans. You can also choose between an adjustable interest rate or a fixed interest rate for this type of loan.
Auto loans are a type of installment loan offered by credit unions, banks, and car dealerships. You can take out a car loan with interest rates ranging from 3% to 15% and loan terms from 12 to 96 months. The longer the term, the higher the interest rate, but the lower the amount you pay each month.
Advantages and disadvantages of installment loans
Most people apply for an installment loan because of its benefits. But there are also disadvantages when it comes to this type of loan.
- Due to fixed payment amounts and schedules, you can easily anticipate how much you need to repay monthly. Such predictability allows you to budget your money effectively.
- Potentially lower interest rates. The advantage of installment loans is that some of them offer fixed interest rates. So, if you have a good credit score, you may choose to take a short-term installment loan to save money over the life of the loan.
- Your credit influences the interest rate and terms of the loan. If you have a bad credit history, you are likely to pay higher interest rates than borrowers with excellent credit. So be sure to improve your credit score so that it is easier to get an installment loan during your financial needs.
- You cannot increase available credit. Unlike credit cards or lines of credit, installment loans have fixed loan amounts. This means you cannot add to the amount you have agreed to borrow from the lender. It is therefore crucial to ensure that you know the amount you need before applying for an installment loan.
To take with
An installment loan is one of the most common types of financing you can get these days. Home loans, auto loans, and personal loans are three examples of installment loans. Installment loans usually come with a fixed interest rate, loan amount, and payment schedule. You can get them from credit unionsbanks, car dealerships or online lenders.