An installment loan is a type of loan where you can borrow a certain amount of money at a go. After that, you can pay back the loan in a fixed number of repayments known as installments. These loans typically have fixed payments amounts, and as such, the amount will not change throughout the life of the loan.
This is different from loans that come with a variable interest rate since the amount can change in such cases. Installment loans are not like revolving credit, and as such, you have to decide on the exact amount of money you would want before even borrowing the money.
You have to agree with the lender on the amount you need when taking out the loan, and the payments are usually every month. However, the schedule can vary depending on the term you have to pay back the loan.
Examples of Installment Loans
– Auto Loans: These are used to purchase a car, and the payment installments are spread out over a range of 12 to 96 months.
– Mortgages: This is the kind of installment loan you borrow to buy a house. Repayment periods vary between 15 and 30 years, making the repayments each month.
– Personal Loans: These can be used for different applications such as sudden expenses and debt consolidation. They have higher interest rates since they do not typically ask for collateral to give you the money you need.
Benefits of Installment Loans
Predictability of the payments is one of the main benefits you enjoy when working with installment loans. The amounts you will be paying for the loan will be the same for each month you will be paying back the loan. As such, budgeting for the loan each month will be more accessible, and you will avoid any missing payments.
You are also more comfortable with an installment loan since you are sure that you can pay it all back by a specific date. Once you have paid back all the installments, your debt will be cleared, and as such, you will be able to get out of debt faster and with less interest for the loans that have the least payment duration.
Disadvantages of Installment Loans
Whenever you decide to take out an installment loan, you have to agree on the amount you need since you will be unable to add the amount you need. As such, you will be required to take a new loan when you need more money. As such, it is always essential to ensure that you know precisely how much you need to borrow when you are looking for an installment loan.
The loan terms and interest rate will be based on your credit, and people with lower credit scores will be paying higher interest rates. Someone who doesn’t have a good credit history will be paying a higher interest rate, and the total cost of borrowing will also have been increased.
The penalties and fees associated with installment loans will also add to the overall up-front cost of the loan. Others even charge a penalty for paying off the loan earlier than agreed.
Are Installment Loans Risky for you?
It is essential that you fully understand all the conditions and terms associated with an installment loan before taking one.
The installment payments make these loans less risky for you, and they are also easier to manage. Paying them back can be included in your budget, and they do not have many complications when you are getting them.
As such, they are ideally suited to your budget and will be much easier to pay back since the payments are in fixed installments that you can easily budget for and make plans in advance to ensure that you have paid back the total amount without any delays.
Whenever you are looking for an installment loan, ensure that you specify the precise amount that you would like to ensure that you have a loan that is easier to manage.
Avoid taking more than one loan simultaneously and always pay back the monthly installments when they are required to avoid damaging your credit score or incurring penalties.
These loans are not risky at all, which is why they are more attractive than typical loans with varied interest rates.