If you’ve been thinking of making a large purchase and you have not set aside the time to save up you may be considering a loan. Borrowing is quite a common way to pay for goods and services that fall outside the range of comfortable affordability. Installment loans are extremely popular among consumers looking to make significant purchases. There are different types of installment loans and the credit savvy consumer is one who becomes familiar with their options prior to signing any loan agreement.
What are Installment Loans?
An installment loan is a loan with a payment arrangement that divides the full repayment obligation down into smaller portions to make large purchases more affordable. Monthly payments are the most commonly used installment increments. These increments or monthly payments are typically enhanced by interest charges and, in some cases, monthly service fees. This is how most creditors and loan servicers earn money from lending to you. Installment loans are repaid over a schedule that is agreed upon in installments that are pre-determined.
The most common types installment loans are:
Luxurious Credit Note: Revolving credit accounts such as credit cards are not considered installment loans as they do not have a pre-determined schedule for payment.
How Do Installment Loans Work?
Before an installment loan can be secured there is an application process to determine the maximum amount of money the potential borrower is eligible for. This process is also used to determine what type of repayment terms the loan will entail. Interest rates for installment loans are based on the borrower’s credit score. Occasionally, some loans, such as first time homebuyer loans, may require additional insurance. Once all of the factors have been determined and agreed upon, a monthly repayment schedule is developed and installment amounts are calculated.
Short-Term vs. Long-Term Loans
One year to three year loans are considered short-term. 10 to 20 years are long-term. These parameters make big ticket items such as vehicles and homes financially feasible to people who can’t afford to pay for them all at once. Short-term loans are a convenient alternative because they give individuals access to large sums of money immediately. This type of loan can be used strategically for building up a credit score in preparation for securing a larger loan later, such as a car loan or a mortgage.
Secured vs. Unsecured Installment Loans
Secured installment loans require a collateral matching the full value of the loan itself. Unsecured installment loans are granted based on the borrower’s credit score. Most often, secured loans tend to have higher interest rates and less flexibility than unsecured loans. However, if you have poor credit and are in need of a loan your vehicle title can quickly become collateral to resolve your temporary financial crunch.
Is an Installment Loan Right for Me?
An installment loan is right for you if you know exactly how much money you need and how long you will need to borrow it for. After examining your credit profile and doing everything possible to improve your credit score, go ahead and apply for a loan. Depending on the goods or services you plan to purchase, you will need to be prepared to pay a down payment that is more than enough to secure an approval for your desired loan.
Interest rates are generally lower on installment loans than credit cards. If is for this reason that people prefer to use installment loans to make significant purchases. By reading this article you have already begun taking the opportunity to learn what you need to know about installment loans to be sure you get the best possible arrangement to fit your financial needs.