Even if you’re not familiar with the term “installment loan,” you probably know what one is. You might even have an installment loan in your name right now.
An installment loan is a type of debt in which you borrow a certain amount of money and repay it through regular monthly payments. If you need to borrow a specific amount of money to purchase a car or pay for college, an installment loan may be the right choice.
What are Installment Loans?
An installment loan isn’t one specific loan, but a broad category of loans that all follow the same rules. In taking one out, you:
- Borrow a specific sum of money, called the principal amount (e.g., $10,000)
- Agree to repay the principal amount plus interest (e.g., 6%)
- Make monthly installment payments over a set term (e.g., 60 months)
Using the example above, an installment loan of $10,000 with a 6% interest rate for 60 months would require a payment of $193.33 every month. Your total monthly payment depends on the amount you borrow, the interest rate assessed, and the number of months you have to pay.
There are many different types of installment loans that you may try to obtain. Some offer longer terms than others based upon their purpose:
- Auto loans (generally 12-96 month terms)
- Mortgages (generally 15-30 year terms)
- Personal loans (generally 6-96 months)
Keep in mind that you should only borrow the amount you need, not more—since you’re charged interest on every dollar lent to you.
Pros of Installment Loans
Installment loans offer a few unique benefits when compared to revolving loans like credit cards and lines of credit.
Most important, installment loans offer predictability. Since your monthly installment amount is determined at the beginning of your loan, you know exactly how much you need to pay every month. This amount doesn’t fluctuate like a credit card balance, so you’re never blindsided by your bill.
Installment loans are also fairly flexible. They can be tailored to your specific needs by adjusting the repayment terms or total amount borrowed. It’s also possible to refinance your installment loan for a better interest rate if your credit score improves in the future or lower rates become available.
Cons of Installment Loans
On the downside, an installment loan locks you into a long-term financial obligation that you can’t escape. You must make the required monthly payment every month or risk your loan falling into default.
Since some installment loans include collateral, a default could be devastating. If you default on a mortgage installment loan, your house may be foreclosed. If you default on a vehicle installment loan, your car could be repossessed.
Even when no collateral’s involved, failing to make payments on your installment loan will tarnish your credit report and sink your credit score.
How and Where to Get Installment Loans
Installment loan approval is never guaranteed. You need to apply and give lenders the opportunity to review your credit score, annual income, and debt-to-income ratio. This information helps banks and other lenders determine whether you’re a trustworthy borrower who can afford to manage an additional monthly payment.
You can start with Fiona, one of the fastest, easiest, most comprehensive way to search for loans from the top providers.
It’s free to use and the application takes less than 60 seconds to complete. Fiona will search all the top online lenders to get you the best personal loan anywhere between $1,000 and $100,0000. You’ll find rates as low as 3.84% APR and loan terms from 24-84 months depending on the lender.
If your credit score and income are too low, or your debt-to-income ratio is too high, you may not qualify for an installment loan. If you do qualify, it may come at the cost of a higher interest rate.
But you can check with OppLoans, where even if you have a poor credit score you could still get a personal loan for your short-term financial needs (up to $4,000) depending on your state and eligibility.
Make sure you follow these steps to increase your odds of approval:
- Check your credit scores and credit reports with Equifax, Experian, and TransUnion. Correct any errors you see.
- If you have the extra cash available, pay down high credit card balances to decrease your debt-to-income ratio.
- Do plenty of research on banks, online lenders, and credit unions, and only apply to companies who offer fair rates and have a strong reputation.
- Make sure you can afford the regular monthly payment amount without overextending your budget.
An installment loan is a common and popular way to borrow the money you need. Just be sure you get the right one, and the best terms given your finances.