How do installment loans work?
After you are approved for an installment loan, the lender will usually deposit the funds into your bank account. You then repay the loan amount plus interest over the period specified in your loan agreement. For example, if you received a $ 2,000 loan with a 12 month repayment period and an APR of 11.8%, you would make 12 payments of $ 178.
Types of installment loans
Many loan types share the rate structure – you may even have one now. Here are some examples of installment loans:
Personal Loans: An unsecured fixed-rate loan that you repay in fixed bi-weekly or monthly installments.
Car Loans: A secured loan, usually with a fixed interest rate, that you repay in regular installments.
Student Loans: An installment loan that can have a floating rate with payments that fluctuate over time.
Where can you get an installment loan
Banks, credit unions, and online lenders all offer personal installment loans. Compare lenders to find one that offers the best rates, terms, and credit features.
Only a handful of national banks offer unsecured installment loans. If this is the case with you, this is probably a good place to start comparative buying as banks sometimes offer lower interest rates or milder borrower requirements for existing customers.
Small Dollar Bank Loans: Loans below $ 1,000 are rare with large banks; however customers of US bank and Bank of America may qualify for a few hundred dollars loan paid back in three equal monthly installments.
Credit union personal loans are available to credit unions, usually at lower interest rates than other lenders. Federal banks limit the rates for personal loans to 18%. Credit unions can check your membership in addition to your credit profile when applying for a loan, giving you a better chance of qualifying.
Small dollar loans from credit unions: Some credit unions also offer a type of small personal loan called a. at Payday Alternative Loans. These loans are typically $ 1,000 or less, repay monthly over a year or two, have an APR of less than 28%, and may not require good credit to qualify.
Online lenders serve a wide variety of customers. Some are aimed at borrowers with excellent credit scores, while others offer loans to borrowers with poor credit scores. Online installment loans usually have interest rates between 6% and 36% and are repaid over two to seven years.
Unlike many banks and credit unions, you can use most online lenders classify beforehand to see what rate, term and monthly payment you qualify for. Prequalification does not affect your creditworthiness, so you can review offers from multiple lenders.
Small Dollar Online Loans: Small dollar loans from online lenders can be difficult to navigate. Some lenders offer this Small loans with APR less than 36% – the maximum rate consumer advocates call affordable – but others charge significantly higher and expose borrowers to default risk. Capital goods fund is an online lender providing relatively inexpensive small loans to borrowers in six states, starting at $ 300.
When does an installment loan make sense?
Here are three purposes for which a personal installment loan can be a good idea:
Debt Consolidation: An installment loan can combine other unsecured debts, including high-interest loans and credit cards, into a single monthly payment. Receive Debt Consolidation Loans is a good idea if the new interest rate is lower than the combined interest rate on the debt you are consolidating.
Home improvement projects: There are many home improvement financing options out there, but if you know how much money your renovation will cost and you can qualify for a low interest rate, an installment loan can be a great way to get in pay for home improvement.
Emergencies: Because they can be expensive, an installment loan should not be your first choice in an emergency. Look at you instead Alternatives that costs little or no interest. However, if you have a plan to make your payments and need the money quickly, an installment loan can help survive an emergency.
Before you take out an installment loan
As with any type of loan, it is important to take steps to ensure that you are getting a loan that suits your financial goals and budget. Our recommended steps:
Weigh the pros and cons: Installment loans have advantages over other forms of credit, including credit cards, but also disadvantages. Learn more about installment loans and consider the pros and cons.
Do you know your credit score: Higher credit borrowers get lower interest rates, which means less interest costs over the life of the loan. When your credit needs to work, do what you can Increase your score.
Do you have a plan to pay it off: If you don’t have one yet, draw up a budget that makes up your loan repayments. NerdWallet recommends spending 20% of your budget on debt payments and savings.
Installment Loans vs. Payday Loans
Installment loans and payday loans are named accordingly, because while you repay an installment loan in regular installments, you usually pay off a payday loan on the next payday.
Installment loans are therefore often cheaper than payday loans. You may find it easier to plan and repay a loan that is divided into multiple payments over multiple payment periods.
Installment loan vs. credit card
The fact that you get the money from an installment loan in a lump sum is what sets it apart from a credit card. A credit card is revolving debt – you borrow when you swipe your card, repay, and then retry.
An installment loan, on the other hand, does not turn: you borrow, repay and that’s it.