Do you know what an installment loan is? If not, you should become familiar with them. Why?
More and more people are turning to installment loans to help them close financial gaps. The average amount of installment loan debt is more than $14,000 for people between 45-54 years old.
Read on if you want to know the answer to the question, “What’s an installment loan?”
What’s an Installment Loan?
Have you ever taken out a car loan, student loan, mortgage, or a personal loan?
That’s an installment loan. They’re loans that you can take out for just about any reason, even to finance a vacation. The reason why they’re called installment loans is that that’s how you pay them back. You pay them back in monthly installment payments.
The monthly installment payments combine the interest with the principal amount borrowed. The payments are spread over the term of the agreement. With installment loans, the payment terms can be as short as 12 months or as long as 30 years.
When you’re paying back an installment loan, you start by paying off more interest than the principle. Over time, you’re paying off the principle with a small amount of interest until the loan is completely paid in full.
The reason why so many people are turning to installment loans is because of the flexibility of the loans. They can be used for anything. You can consolidate high-interest credit card debt into a lower interest loan, which can save you money.
You can also use an installment loan to finance a renovation project in your home. If you pick the right project, like landscaping or a new kitchen, you can add value to the home. That’s a great way to leverage a financial loan into a monetary gain.
Installment Loans vs. Credit Cards vs. Lines of Credit
You may have heard of terms such as installment loans, credit cards, and lines of credit. What’s an installment loan and how does it compare with these other financial means of borrowing money?
Credit cards and lines of credit are revolving credit accounts. You have a maximum amount that you can borrow. The expectation is that you’ll pay back the credit you took out before the next billing cycle. Otherwise, you could pay more in interest.
For example, you charge a $2000 vacation on your card. You get the bill and you only pay back half of the bill in the first payment. You’ll then be charged interest every month for that purchase until the amount is paid off.
How to Get an Installment Loan
You now know what’s an installment loan and you know how it differs from other types of credit. Want to know how you can get an installment loan? Let’s dive right in.
Credit Score
The main consideration that many lenders will look at is your credit score. That’s how your interest rate is determined and whether or not you qualify for a loan.
If you have poor credit, you can still get an installment loan from some lenders. It’s probable that you’re going to pay a higher interest rate. With a good to excellent credit score, lenders will see that lending to you is a lower risk, and you’ll be rewarded with a lower interest rate.
Does the interest rate really matter? Yes, it does. You take out a $15,000 loan that’s to be paid back in 36 months. Your interest rate is 5.065% and your monthly payment is $450. Over the life of the loan, you’ll pay $1,200 in interest.
Let’s take the same scenario but change a couple of numbers. You have a monthly payment of $475 instead of $450. Another $25 a month doesn’t seem too bad. Your interest rate is 8.713% and you’ll pay a total of $2,100 in interest. That is a $900 difference in interest!
You’ll need to make sure that your credit score is as high as possible before you apply to get those lower interest rates.
Budget
When you are getting an installment loan, you want to make sure that you are getting the best interest rate possible and you can afford the monthly payments.
You might be tempted to extend the terms of the loan to 48 months or even 72 months to get lower monthly payments. That’s not a bad thing to do, but you want to look at the total amount of interest you’re paying over the life of the loan.
Take a close look at your monthly income and expenses. You also have to weigh the purpose of the loan. You can take a little more leeway for a mortgage or a car loan than for a loan to finance your vacation.
In the case of debt consolidation, you might find that you can lower your total monthly expenses because you’re paying a lower interest rate and you have one payment for your debt.
Applying for a Loan
When you apply for an installment loan, there are a few things that you’ll need to have for your application.
You’ll need to make sure that you can verify your income. You can’t put down any number. You’ll need to prove your income by providing income statements, pay stubs, or a W-2 form from your employer.
Read this guide from Bonsai Finance that takes you through the application process.
Installment Loans Can Save Your Finances
What’s an installment loan? It’s a way to dig yourself out of a financial hole or move up in the world by financing your education, home, or home renovation.
They’re incredible to have because they’re so flexible and can be used for just about any purpose. If you want to get an installment loan, you’ll need to look at your credit score and your budget to determine how much loan you can realistically afford.
Want more financial advice? Find out how a personal loan can help you boost your credit score.
