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5 Things You Should Know About Installment Loans

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A loan can be a lifesaver, especially when you need money urgently. This is why we rely on loans for a quick financial fix. They are vital when something that requires a lot of money pops up unexpectedly and you have no other financial assistance to rely on. Have you come across installment loans? Nowadays, many people choose payment loans as they are not properly informed about installment borrowing (which is becoming more popular).

Due to lack of information, you may not apply for the best installment loan just because you don’t know how they work. So how do these loans work? This article provides an explanation of installment loans, their pros and cons, and five things you should know about them before applying.

What Is an Installment Loan?

An installment loan is a type of money borrowing where the borrower pays the debt off with the help of monthly installments. Installment loans are safer alternatives to predatory loans. However, this does not mean that installment loans are right for you. The easiest way of getting an installment loan is by applying online. Internet loans are popular for those in urgent need of money. However, you must meet the requirements, which include:

  • Aged over 25 years
  • Provide the lender with your bank account to facilitate the bank transfer
  • Have a minimum income of $1,300 a month as proof that you’ll be able to settle the loan
  • Proof of employment—you’ll need to provide a paystub from your employers

How Long Does It Take to Repay?

The length of installment loans depends on the term length that you selected and your ability to make the required monthly payment amount. For timely payments, you need to first figure out how much the loan will cost and how long you will have to pay it back. Some loans like title and payday loans require you to pay off the whole amount in as little as two weeks or a month. With these loans, it is likely that you’ll be forced to make a single, lump-sum payment, which can be hard to manage.

This is why installment loans are better—you can pay back the amount with regular payments over a longer period of time, typically between six months and three years. This is the reason they are known as installment loans. When applying you must determine the term of the loan. Once you know the loan’s term, you will understand how much the loan will cost you. Therefore, we recommend that you first know what the term will be before signing the loan agreement. You do not want surprises once you have already taken out the loan.

Interest Rate

When you’re given a loan, it is not free. Lenders make money through lending by charging interest to borrowers. This is why it is very important to take the interest rate into consideration. The rate should be affordable. The interest rate quality typically depends on your credit score. The worse your credit score, the higher the interest rate. Essentially, it is vital you first build up a good credit history before applying for installment loans.

If your credit score is too low for installment loans, there are other options. There are lenders that accept co-signers if you have a bad credit. The co-signer should have a good credit history. With the co-signer, you are more likely to get a favorable interest rate or qualify for a loan you would otherwise not get on your own. Compare the costs of different loans by looking at the APR. This allows you to understand the total cost of the loan, including all fees and interest so you know how much you will end up repaying.

Prepayment Fees

The lender makes money from the interest you pay. Borrowers pay more interest the longer their payment term is. The lenders have an incentive to keep the borrowers from paying off their loan sooner, which explains why some loans have prepayment penalties. The prepayment penalty is often associated with mortgages. If the homeowner is moving and wants to sell the home to pay off the loan, they are typically charged a prepayment penalty.

It is vital to know if your lender charges prepayment penalties before committing to the installment loan because once you sign, you will be obligated to follow the terms of the loans. The good thing is that the penalties are typically less common. Besides, the prepayment penalties are illegal in 14 states and the rest of the 36 states have drastically reduced the amount of loans issued with penalties.

Collateral

Some installment loans are secured loans, meaning that the borrower offers up a valuable piece of property as collateral. The positive aspect of the secured loan is that they have lower interest rates. However, failing to pay back this loan means that the lender can seize your collateral and sell it to make up for the resulting loss. One of the most common secured loans is a mortgage where your home serves as the collateral. The same applies to auto loans.

In title loans, you can use your car as collateral. These are typically high-cost loans secured using the title to a car, however you will lose the title if you fail to pay back the loan. Regardless of the type of installment loan, ensure you first understand the terms and whether there is collateral involved.

Amortization

Installment loans offer amortized payments, meaning each payment goes towards settling the interest and part of the principal. Without amortization, your payments could be going towards the interest alone which can trap you in the forever. Therefore, make sure you know what you are signing up for.

Pros & Cons

Installment loan lettering

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Pros

Installment loans are profitable for lenders as you borrow once but pay off both interest and principal gradually. For borrowers, the loan helps you prolong your payment and adjust the payment to your income. You also have the option of coordinating your payment with the help of installments. You have an option of paying your debt quicker with bigger installments or slower with smaller installments. The installments depend on your ability to pay them. The flexibility allows you to repay over terms between 3 and 12 months.

Another advantage is that you can take these loans out with bad credit. Further, the loans are known for their availability. You can apply anytime but make sure you qualify for them. They typically have an easy application process.

Cons

The loans, just like any other loan, are tricky and can come with terms like collateral, meaning there is a likelihood you’ll lose your collateral if you don’t pay. Another aspect is that the fees are not advertised along with the credit insurance forms, which may increase the sum of money you must pay off. These loans are also known for their high interest. The best thing is to compare when shopping around is which lender offers the most reasonable terms.

5 Things You Should Know About Installment Loans

Calculator with a text loan and a pen beside it

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Before applying for an installment loan, here are five things you need to consider:

  • 1.) If you apply online and the loan is approved, the money is deposited within a business day. This makes the loan convenient as you don’t have to wait for days as one must do in traditional lending.
  • 2.) The loan comes in handy when paying for unexpected expenses while managing monthly bills. In this case, you can apply for a longer and more flexible repayment term.
  • 3.) When applying for the loan, your state of residence is a factor to consider. To apply for the online installment loan, you must reside in the state in which the lender offers the loan. For example, if you reside in Minnesota, you are not able to apply for loans offered in Utah.
  • 4.) The installment loan companies should be licensed by the state in which they are offering their services and products. This is an important factor to know when applying. You should always opt for a licensed lender.
  • 5.) The repayment amount and installment schedules vary from one state to another and are subject to the policies set by the lender. Get to know the rates and terms before applying.

Conclusion

Loan and below is a piggy bank and dollar symbol

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Installment loans are characterized by monthly installments but are safer alternatives to predatory loans. You must be able to pay off the loan within the agreed time-span. This means you need to first figure out how much the loan will cost and how long will you have to pay it back. The loans are better as the repayment period is between six months and three years. However, you should have a good credit history for a favorable interest rate. You may use a co-signer if you have a bad credit. We recommend that you build a good credit history before applying.

Some loans are secured loans and the borrower must offer a valuable piece of property as collateral. Installment loans offer amortized payments. For lenders, they are profitable as borrowers pay off gradually. For borrowers, the loan helps you prolong your payment and adjust the payment to your income. You can also coordinate your payment with the help of installments. However, you should be wary since lenders do not advertise fees that come along with the credit insurance forms—this may increase the sum of money you must pay off.

Installment loans are a safe and viable alternative to short-term payment loans, but note that both these types of loans aren’t created equal. This is why you need to understand the terms of the loan. We hope this article has adequately addressed what installment loans are, their pros and cons, and five things you should know about them before applying.

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