Installment loans have always been a popular choice for securing loans and financing.
You can use them for a variety of expenses, both big and small. And they come with loan terms that are easy to follow and maintain.
However, with a wide range of short-term loans available, we often misunderstand the utility of installment loans.
Since short-term loans give you quick access to cash, they can be a tempting alternative.
But with the right information, you’ll realize that installment loans usually make a wiser financial choice.
How do Installment Loans work?
An installment loan begins with the borrower filling out the application form for the loan. It may include necessary information such as the borrower’s identity, the loan’s purpose, etc.
The lender will check your credit capabilities to see whether you qualify for the loan. This stage is where your credit score and credit history comes in.
The better your score, the better your chances of getting favorable terms and a lower interest rate.
The terms and schedules
The lender will discuss the terms of the loan, payment schedule, amounts, down payment, etc. These discussions will give an effect on your loan and how you have to repay.
The exchange is complete when the borrower pays off the last of the debt within the agreed period. If you have a prepayment provision, you can pay off the loan in chunks before the period ends.
Note: There are often additional fees that the borrower has to pay – for example, loan origination fees, application fees, etc.
These factors make them an ideal choice for many borrowers. There are clear advantages you get with installment loans, which you don’t get elsewhere. But there are also risks and drawbacks to consider when applying.
Let’s look at these advantages and dangers in closer detail.
Installment Loans: The Pros and Cons
Installment loans clearly offer a wide range of benefits and the same goes for the consolidate car loans process. These benefits can all appear in a single loan if you have the right conditions. Otherwise, they may come in a variety of situations.
- Flexibility – The single best feature of installment loans is the flexibility it offers. Based on the loan amount and the repayment period, you have multiple possibilities. You can decrease your overall interest rate by opting for a shorter repayment period, but this means higher monthly fees. Or you can choose lower monthly payments for an overall higher total at the end. Either way, you can choose based on the current financial situation and future prospects.
- Bad credit availability – There are installment loans that work particularly well for people with bad credit. The terms may not be as favorable as those with good credit. But they can be lifesavers for those who do not want to risk short-term loans.
- Higher Loan Amounts – Installment loans allow borrowers to get higher amounts based on their eligibility. Borrowers can use these bulk amounts for long-term purchases or covering multiple expenses. Short-term loans, however, usually restrict you to lower amounts.
- Better impact on Credit Score – When you repay an installment loan, you have to do it in regular payments. Over time, these consistent payments reflect positively on your credit history. It shows that you can honor your financial obligations over an extended period. Short-term loans rarely have this positive effect because they’re usually cleared on single bulk payments.
Installment loans, like any other loan, come with specific risks and disadvantages too. As a responsible borrower, you have to be aware of these factors before you sign your forms.
- Possible higher interest rate – With installment loans, the interest amount can increase with longer repayment periods. While it is convenient to stretch out the repayment over longer durations, you end up paying more than prevailing rates.
- Long Financial Obligation – Installment loans engage a borrower in long-term financial responsibility. He/she has to keep up the agreed payment schedule regardless of the financial situation.
- Credit Checks – Lenders will most often perform hard inquiries on your credit for these loans. If you do not uphold your repayment commitment, your credit history invariably suffers.
Installment loans come with a whole lot of advantages and some risks too. But if you manage your finances wisely, you can reap the loan benefits without falling into the risks involved.