Installment loans are loans that have pre-determined and pre-schedules payments over a period. This means, you borrow money from a lender and agree to pay back the loan along with interest every month. Installment loans include auto loans, student loan, mortgages, credit card, etc. Depending on your financial condition and credit score, installment loans are a great way to pay for college, home or car.
Generally, installment loans can be applied by everyone and are of two types- secured and unsecured. In the secured type, you will have to assure the lender that he will be paid back using collateral such as a house or a car. This will also give the lender the ability to seize the collateral in case you fall behind on your payments. This makes secured loans riskier for you than the lender as you may end up losing your valuable asset if you do not pay on time.
Unsecured loans are simpler because they don’t require any collateral. However, though you may not end up losing any of your assets, you may end up damaging your reputation. Unsecured loans are riskier for lenders as they won’t be left with an alternative in case you default on the payment. The only way out for the lender is to charge you a high interest rate.
Payday loans have a high interest rate and are provided for a short duration of time. Also, payday loans are often paid as a lump-sum amount. On the other hand, installment loans can be paid over several months’ time and the payments too are spread out evenly over the loan period.
A potential lender will definitely validate your annual income, credit card score, debt-to-income ratio to understand how much you can afford to borrow. Additionally, he may also ask you several questions pertaining your employer, previous jobs, etc. All this will help the lender to determine how you will possibly manage the monthly installment loans.
As credit card score plays an important role in determining if you are eligible for an installment loan, it is imperative that you keep a tab on your credit score several months before applying for a loan. You can get avail a free credit report snapshot or receive customized advice from the experts who will help you take the necessary steps to keep a check on your credit score.
It is also important to ensure that your credit reports are error-free and accurate before applying for the loan. You may request a free credit report once a year from major reporting agencies such as the TransUnion, Experian, and Equifax.
It is recommended that you pay off any high credit card balances before applying for any installment loans as lenders will check your debt-to-income ratio as well.
All this will help you fetch a better deal and help you from over-extending the payment.
There are plenty of places such as banks, online lenders, credit unions short-term lenders, etc that you can avail loan from. However, ensure that you borrow money from reputed lenders.
It may be a wise decision to apply for an installment loan from your existing bank rather than looking for options elsewhere. Assuming that you have been regular and responsible for managing your money, they may even offer you favorable repayment terms and ease the lending criteria. However, if you do not qualify for most banks, then credit unions are your next best option to borrow from. They may consider your request and offer you a loan.
Availing installment loans with online lenders is gaining momentum as it is quicker than the traditional options and convenient too. However, there is a small glitch here as you may have to pay a high APR.
Do weigh the pros and cons carefully before deciding on getting a lender.
Lenders may charge you an origination fee up to 6% of the total loan amount. Make sure that your APR includes it. Also, do check if your lender would charge you for any unsuccessful fees payment, late fees or fees paid via checks. Avoid lender who tends to charge prepayment fees for paying your loan ahead of the scheduled time. Ask for the prepayment fees to be waived off in writing from the lender.
Spreading your loan over a longer period of time may lower the monthly payments but you will end up paying significantly higher as the interest will be more. A shorter term would, however, make you pay higher amount but will definitely keep your overall costs down.
Some of the quality lenders that offer installment loans sans the over-priced APRs or devious tactics include Lending Club, PersonalLoans.com, Avant, and Prosper.
It is important that you understand your requirements first before applying for any installment loans. Also, double checking with the lender’s terms and conditions will help you have a better understanding of managing your payments.