How Do Installment Loans Work and Are They Worth The Risk

December 21, 2016
How Do Installment Loans Work

Installment loan… that’s the comprehensive, basic term describing most commercial and personal loans people can get. What’s an installment loan? It’s any money that you must “regularly” pay back in a certain period of time. Every payment you make toward the loan is used for the principal and interest. The key variables that go into determining what your loan payment would be are:

  • Loan amount
  • Interest rate
  • Loan term (length)

The Basics Of Installment Loans

So, what kinds of loans qualify as installment loans online? If you get an auto loan, personal loan or mortgage, these are known as installment loans. Mortgage loans are the only loans that come with a variable rate – interest rates that change during the loan’s term. Other loans are fixed-rate loans – the interest rates on these loans stay the same from the day you’re approved.

What does that mean? It means the amount you pay back each month stays the same, which makes it easier on you and your budget to pay it back.

These loans can be either collateralized or non-collateralized. Mortgage and auto loans are collateralized loans – the house or vehicle is the collateral. Personal loans are provided with no collateral needed. These loans are given based on a person’s credit history and their ability to pay the loan back – a credit score and income. The loan rates tend to be higher than what you’d see on a collateralized loan.

What’s The Process To Attain An Installment Loan

The first thing you need to do, in order to get a loan, is to fill out a lender’s application. You’ll be asked what kind of loan you’re asking for – personal, mortgage or car. The lender will talk to you about the different options about the loan:

  • Down payment
  • Loan terms
  • Repayment schedule
  • Monthly due amounts

For instance, you need $10,000 to buy a vehicle. The lender tells you that putting down a down payment will reduce the interest rate or that you could get a lower monthly payment by extending the loan for a longer term. They’ll look at your credit history to come up with an amount and term that they’d be willing to provide you.

You may have to pay fees for the loan like loan origination fees and application processing fees. There are other fees that you could be subjected to like late payment fees and interest charges.

You reduce the loan amount by making your payments. You can save money on the interest by paying more than the loan asks for every month and paying it off before the loan agreement states. Some loans have prepayment penalties should you decide to pay the loan off early.

What Are The Benefits and Drawbacks Of Installment Loans

Benefits

The great thing about installment loans is their flexibility, which can be easily adjusted to meet your needs – length of time to repay the loan and loan terms. They allow you to get financing at a lower interest rate than you’d get with a credit card or other revolving credit financing offer. They allow you to keep cash for other life’s necessities.

Drawbacks

With long-term loans, you may have a higher fixed interest rate loan for you to make payments on. You could refinance that loan to a lower interest rate. You may also be locked into a long-term financial obligation. If you find yourself unable to pay – for whatever reason – you could default on the loan and risk the ability to get credit in the future.

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