What is an installment loan: mortgage, auto, personal, student
What is an installment loan? An installment loan is a type of loan when you borrow an amount of money all at one time. You then repay the loan over a fixed number of payments, called installments. Many installment loans also have fixed payment amounts. In other words, the amount doesn’t change over the life of the loan — whereas if you have a variable interest rate that amount can change.
Is the term “installment loan” familiar for you? We are sure that yes, may be even you have already taken one
So what exactly is an installment loan? It’s a type of loan that allows you to borrow a set amount of money when you take out a loan. Unlike forms of revolving credit, such as credit cards or a line of credit, you must decide exactly how much money you need before borrowing the funds.
After borrowing the funds, you then have to repay the installment loan over a fixed period of time, which you and the lender determine when you take out the loan. Payments are typically monthly, but schedules can vary.
- Each payment is known as an installment which is why it’s called an installment loan
- Auto loans
- Personal loans
- Student loans
Benefits. What is an installment loan
- In most cases installment loans will come with predictable payments
If you take out a fixed-interest-rate loan, the main components of your payment will persist the same each month until you pay off your loan.
- A predictable payment amount and schedule will make it simpler to plan for your loan payment every month
It helps you to avoid missing any payments because of unexpected changes to the amount you owe.
When taking an installment loan, be sure the monthly payments won’t harm your budget. If they do, you may have problems paying off the full amount when a financial emergency happens.
Installment loans also offer the comfort of knowing your debt can be paid off by a specified date. After you’re done paying the number of installments required by the loan, your debt should be paid off in full.
- If you get a loan with the shortest payment term you can reasonably afford you can get out of debt faster and will probably pay less interest
Downsides. What is an installment loan
- You can’t add to the amount you need to borrow
Instead, you’ll have to take out a new loan to borrow more money. When you take an installment loan, make sure you know exactly how much you need to borrow.
- Your interest rate and other loan terms are largely based on your credit
If you have low credit scores because of previous unsuccessful credits, be ready that you’ll have to pay a higher interest rate than borrowers with strong credit histories.
Higher interest rates result in larger monthly payments and a higher total cost of borrowing. If possible, work to improve your credit health before applying for an installment loan
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- Installment loans can come with other fees and penalties
Some lenders require you to pay application fees (often called origination fees) and credit check fees, which increase your total cost up-front. They also sometimes charge prepayment penalties, which require you to pay a fee when paying the loan off early.
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Now you know all you need about what is an installment loan and you can thoughtfully find the best installment loan for your particular situation.
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