I’m in a financial bind, and I’m looking to borrow money to get the cash I need. A lender has offered me an installment loan, but I’m a bit confused about these types of loans. Is it similar to a personal loan through the bank? Can you explain how installment loans work?
Emergencies can be stressful, especially if you don’t have the money to cover the costs out of pocket. You’re not alone in this matter – about 60% of Americans couldn’t cover an unexpected $1,000 expense.
Loans are one way to get the cash you need, and there are many different types of loans out there. Although the term “installment loan” may be unfamiliar to you, you’ve probably used – or heard of – some of the most common types of installment loans.
Simply put, an installment loan allows you to borrow a specified amount of money, and repay that money over a set period of time. Typically, these loans are paid in monthly installments, but schedules may vary.
Does this sound familiar? If so, that’s because you’ve probably taken out some kind of installment loan. Some of the most common types include:
- Mortgages: Used to purchase a home. These installment loans are usually repaid over 15-30 years through monthly payments.
- Personal Loans: Funds you can use for a variety of purposes, such as medical expenses. These loans usually have terms of 12-96 months, although some online installment loans may have shorter terms.
- Auto Loans: Used to purchase a vehicle. These loans have terms of 12-96 months. Longer terms offer lower payments, but they also come with higher interest rates. Ultimately, you wind up paying more for the vehicle in the long-run with a longer loan.
Installment loans offer many benefits. For starters, you know exactly how much your monthly payments will be (as long as it’s a fixed-rate loan) and for how long you will pay back the loan. Having a predictable payment schedule and amount will help you budget and plan for this expense.
If you decide to take out an installment loan, make sure that the payments won’t stretch your budget too thin. Otherwise, you may get caught in a vicious cycle of having to continuously borrow money to cover your expenses.
Of course, there are some things you need to consider before choosing this type of loan. It's important to remember that you can’t add to the amount you need to borrow like you would with a credit card or revolving line of credit. If you need more money, you’ll have to take out another loan – and that may not be possible if your credit situation is less than perfect.
Speaking of credit, what’s your score look like? The cost of the loan – and whether you get approved – will be largely dependent on your credit. The higher your score, the lower the rate and the better your chances of being approved. Lower scores translate to higher interest rates and monthly payments.
Some installment loans also come with extra fees and penalties. For example, some lenders charge an application fee (known as an origination fee) and fees for credit checks, which increases your upfront costs.