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What Is An Installment Loan?
Installment loans refer to any loan which is repaid in regular installments. This can include personal, auto, mortgage, and student, commercial, and commercial loans.
An installment loan refers to any personal or commercial loan repaid in regularly scheduled payments or installments. Each repayment will comprise a proportion of the principal amount borrowed and payment of interest on the debt.
The amount paid back will depend on the total amount of the loan, the interest rate, and the duration of the loan term. Typically, the payment will be the same amount each month.
What Types Of Installment Loans Are There?
Generally speaking, any type of loan that is paid off in regular monthly payments can be considered to be an installment loan. This includes mortgage loans, personal loans, auto loans and student loans. The majority of installment loans tend to be fixed-rate loans meaning that the interest rate is the same throughout the duration of the loan term and borrowers pay back equal amounts in each installment. Mortgage loans are the only exception as they are sometimes a variable-rate loan where the interest rate fluctuates during the loan term.
Are Installment Loans Secured Or Unsecured?
Installment loans can be secured or unsecured. Secured means the borrower has to put up collateral, whereas unsecured loans are non-collateralized. For example, mortgage loans are collateralized with the property being purchased acting as the collateral. Similarly, for auto loans, the purchased car will act as collateral.
However, some installment loans can be given without the need for collateral. Personal loans that are not collateralized are usually assessed by looking at the borrower’s creditworthiness and ability to repay the loan. For these types of loans, a lender will typically look at the borrower’s credit score and credit history, their income and their assets.
As a general rule, the interest rates for unsecured loans tend to be higher because the loan extension is riskier for the loan provider.
How Can You Apply For An Installment Loan?
To apply for an installment loan, a borrower must fill out an application with the lender. Usually, at this stage they will need to specify what the loan is for. Lenders will discuss different available options with the borrower regarding the duration of the loan, the deposit value, the payment schedule and how much each payment will be. Additionally, the lender will typically review the borrower’s creditworthiness to determine the loan terms and what amount of credit they are willing to offer.
The loan term is finished when the borrower has made all the required payments. Sometimes, borrowers can repay the loan before the end of the loan term and save money on interest charges.
Should I Take Out An Installment Loan?
There are many advantages to taking out an installment loan. Borrowers who have installment loans can benefit from their flexibility; installment loans can be tailored to suit the borrower’s specific needs regarding duration of the loan term and the loan amount to ensure that the borrower is able to meet repayments.
Additionally, Installment loans offer a far lower interest rate than some other forms of credit such as credit cards.
Paying off the same value each month means that installment loans are easy to incorporate into budgets and allow for long-term financial planning. Also, they enable borrowers to finance big purchases without making a huge layout of cash.
However, the loan fees associated with installment loans can sometimes be high. If taking out an installment loan on a long-term basis, it is possible that the fixed-interest loan agreed at the start of the loan term may be higher than the market rate at a later stage.
Even though affordability of the loan is assessed at the start, if any payments are not met this could cause long-term damage to the borrower’s credit rating reducing their borrowing power for the future. Because the borrower is locked into this financial obligation, if circumstances change they also risk default and possible repossession of any collateral.
How Do Installment Loans Affect Your Credit?
Applying for installment loans will typically require a credit check. Although this may incur a small reduction in your credit score during the credit check, if you are able to make consistent timely payments, installment loans can hugely strengthen your credit.
Payment history represents a large proportion of your credit score meaning that if you are able to regularly repay your installment loans on the specified date, this will benefit your credit rating.
However, if you are unable to meet your monthly repayments for any reason, the consequences can be serious. Payments made more than 30 days late have the potential to reduce your credit score by 50 to 100 points. Usually, lenders will have the option to set up automatic payments; this can save the hassle of remembering when to pay.
Can You Get Installment Loans If You Have Bad Credit?
It is still possible to take out an installment loan with bad credit (below 630) in some cases. There are particular lenders who specialise in borrowers with bad credit. These lenders will have different lending criteria and will check other variables instead of credit rating. Typically, bad credit lenders may look at factors such as bank account transactions, employment history and existing debts.
Generally speaking, banks will not be able to extend personal installment loans for individuals with bad credit. However, credit unions and online lenders will have lots of options available for bad-credit borrowers.
Risks Of Taking Out An Installment Loan
Bad-credit borrowers could be at risk of predatory lending when looking to take out an installment loan. Some lenders take advantage of these borrower profiles and charge extremely high interest rates. Lenders need to disclose the loans APR up front, some of which are 100% or higher; personal finance experts typically recommend that any APR higher than 36% is unaffordable.
If a lender offers no-credit-check loans and does not assess your ability to repay the loan, although this may benefit borrowers who are finding it difficult to secure a loan, it could cause them debt in the future and they are at risk of predatory lending.
FAQs
What if I can’t make a repayment one month?
If for whatever reason you cannot make a loan installment one month you might be charged a penalty or late fee for this. There’s also the danger that if you miss payments your credit score could be damaged. This is why it’s always important to make sure you can afford the repayments on any loan that you take out. It’s also important to let the lender know if you think you’re going to miss a repayment.
If you let the lender know that you might miss a repayment they might be able to work something out with you.
I’ve worked with lenders before – is Capital Bean a direct lender?
No, Capital Bean is not a direct lender but instead acts as a broker, connector or introducer service. We work with a number of lenders to make sure to introduce you to the one that works best for your circumstances. Over the years we’ve helped thousands of people meet the right lender for them at the right time. We never charge any fees to our borrowers, only taking a small commission from the lender if your loan application is successful
How long does it take to apply with Capital Bean?
Our online technology driven loan request application only takes 5 minutes to complete. After you’ve submitted all your information including your name, address and employment status then you’ll receive a quick decision from the lender, in most cases it’s instantaneous. If you are successful then the money can be in your account in under a day.
