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Education News Simulator Your Money Advisors Academy Table of Contents What is an Installment loan? The types of Installment Loans Secured vs. Unsecured Installment Loans When you apply for an Installment Credit Advantages and Disadvantages Installment Loans and Credit Scores The Bottom Line Credit & Debt Purchase Now Pay Later How do Installment Loans Work Flexible terms and lower rates are part of installment loan advantages Author: J.B. Maverick Updated May 20, 2022 Reviewed by Thomas Brock Fact checked by Ryan Eichler An «installment loan» is a broad expression that refers to an majority of both personal and commercial loans provided to borrowers. Installment loans are any loan that is repaid through regularly scheduled installments or regular payments. If you’re considering applying for an installment loan there are pros and cons to be considered first. Here’s what you need to know before taking out an installment loan. The most important takeaways Installment loans are either commercial or personal loans that the borrower has to repay with regular scheduled payments, or installments. With each installment, the borrower pays back a percentage from the principal borrowed. In addition, the borrower is also responsible for the payment of charges on that loan. Examples of an installment loans may include: auto loans and mortgage loans, personal loans as well as student loans. The benefits to advance loans offer flexible terms and lower cost of borrowing. The disadvantages of installment loans are the potential for non-payment and loss or collateral. What is an Installment Loan? An installment loan allows a person to borrow an amount that is fixed to be repaid by regularly scheduled installments. Each installment loan requires repayment by a fraction of the principal amount borrowed, as well as the payment of interest on the loan. The primary factors that determine which amount will be paid out for each routinely scheduled loan payment are factors like the size of the loan that is financed, the interest which is charged to the borrower and the length or term of the loan. The regular amount for payment usually due every month, stays the same for the entire loan duration, which makes it easy for the borrower to budget ahead in order to make necessary payments. In general, borrowers must pay other fees on top of interest charges including processing fees, loan origination fees, and possible additional charges for late payments, for instance. Kinds of Installment Loans Common forms of installment loans are auto loans and mortgage loans or personal loans, and student loans. Apart from mortgage loans which can be variable-rate loans where the interest rate can change over the length of the loan the majority of installment loans comprise fixed rate loans with the meaning that the cost of the interest over the duration of the loan has been fixed since the time of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are secured by the house the loan is being used to purchase. The basis for an auto loan is the car being purchased using the loan. Certain installment loans (often referred to as personal loans) can be extended without collateral being needed. Loans extended without the requirement of collateral are determined on the borrower’s creditworthiness usually portrayed through a credit score, and the ability to repay as is evident by the borrower’s financial situation and assets. The interest rates charged for an unsecured loan generally is higher than the rate that would be that of a secured loan due to the greater chance of non-payment that the lender accepts.1 If you’re planning to get an installment loan You might want initially look at a personal loan calculator to determine the kind of interest rate financially able to manage. Making an application for an Installment Credit A borrower applies for the installment loan by making an application to the lender, which usually outlines the goal of the loan that is, for instance, that of purchasing a car. The lender talks to an applicant a range of options related to questions like down payment, the time frame of the loan the payment plan and the amount of the loan. If an individual wants to borrow $10,000 in order to finance purchasing a car in the example above, the lender advises the borrower that having a greater down payment could get the borrower lower interest rates, or the borrower might benefit from lower monthly payments making an loan to a more long-term. The lender will also assess the borrower’s creditworthiness and determines the maximum amount of credit available, and what loan conditions the lender is willing to give. The borrower typically retires their loan with the required payments. Borrowers usually avoid interest charges by paying off the loan prior to the expiration that period set out by the loan agreement. Some loans will impose penalties for late payments if an applicant pays off their loan in advance. Advantages and disadvantages Installment loans are adjustable and can be designed to meet the borrower’s personal needs regarding the loan amount as well as the length of time that best matches the borrower’s ability to repay it. These loans enable the borrower to receive credit at a significantly lower interest cost than is typically offered by credit cards for example, like credit cards. This means that the borrower is able to keep more cash on available for other needs, rather than taking the expense of paying cash. Pros Capability to finance large purchases The amount that is paid is generally the same throughout loan duration It is normally possible to cut back on the interest cost by paying off loan in advance Cons Loan fees can be high Credit damage can occur due to missed or late payments Potential to borrow more than necessary For longer-term loans an issue is that the borrower could be paying interest on a fixed rate loan at a higher cost than the market rate. The borrower might be qualified to refinance their loan with a less-interest rate. Another drawback of an installment loan comes from the borrower being entangled in a lengthy financial obligation. There will come a time when circumstances might render the borrower incapable of making payments on time at risk of default, and the possibility of losing any collateral used to support the loan. Installment Credit Scores and Loans The ability to pay off an installment loan at the time it is due is a great way to strengthen your credit. The history of your payments is the most important aspect that affects your credit score. A lengthy track record of responsible borrowing is good for your credit rating.2 As previously mentioned, your credit score may suffer if do not pay on time or you default on the loan—which is also a red flag in eye of lenders. The Bottom Line An installment loan can assist you in financing any major purchase, such as a new car or house. Like any loan, there are benefits and drawbacks to consider. Advantages include flexible terms and less interest, however, another major drawback is the chance of default. If you’re planning to take to take out an installment loan ensure that you look around and compare rates and terms offered by lenders prior to signing on the dotted line. Article Sources Related Articles Man looking over papers Personal Loans Payday Loans Compare. Personal Loans What’s the Difference? Small red house , with money pouring out like tape from a dispenser which is resting on top of a fan of $100 bills. Home Equity The Home Equity loan versus. HELOC: What’s the difference? Model of a house on an calculator Mortgage Mortgage Calculator Personal Credit Are Personal Loans Considered Income? Bills tower in man’s hands and blue Background documents. Loans The Most Effective Methods to Borrow Money Two people are working on papers Student Loans Are student loans amortized? Partner Links Related Terms Simple Interest Definition: Who Profits Through Formulas and Examples Simple interest is a quick method to calculate the interest charge on the loan. more Signature Loan A signature loan is a personal loan provided by banks and other finance companies that relies solely upon the signature of the borrowers and promise to pay collateral. more Subprime Auto Loan In short, a subprime loan is a type of loan that is used to finance purchases of cars. These loans are available for those with low ratings on their credit scores, or who have limited credit experiences. More What is a mortgage? Typesof Mortgages, How They Work and Examples A mortgage is an loan intended to purchase or maintain real property. more The meaning of default and what happens when you default, and Examples A default occurs in the event that a borrower does not meet the requirements of a loan, be it interest or principal. More What is an Amortization Schedule? How to Calculate With Formula An amortization calendar is a complete set of regular blended loan payment schedules, which show the principal amount and the interest rate. More
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