An installment loan can be short-term funding for up to $5,000 paid back in at least two payments over a specified period. Here is what you should know before borrowing one.
Installment loans occupy an important space in the financial landscape. Typically issued with lower interest rates than payday loans but higher fees than traditional loans, these financial products are ideal for individuals who need access to money quickly but who might not be able to rely on traditional channels for funding. Before borrowing, it is vital that consumers are aware of at least some basic information about these loans. Below are seven things that consumers should consider before choosing to apply for installment loans.
It is important to remember that installment loans must be paid back. Before an individual chooses to apply for an installment loan, he or she should always factor in the potential monthly payment for the loan into his or her budget. Failure to do so can not only lead to financial difficulties, but it can subject an individual to significant penalties when loan payments are missed or late.
When an individual chooses to apply for an installment loan online, he or she will usually be given both a principle loan amount and an interest rate, as well as a length of time in which the loan can be paid off. These factors can be used to calculate a minimum monthly payment. This is the number that should be used to determine whether an individual can afford the loan.
Failure to properly budget for an installment loan can lead to late payments. If installment loans have a reputation for being costly, it is largely because of the fees associated with late and missed payments. Though many lenders are willing to help individuals to come up with payment solutions to avoid the worst of these problems, the high penalties that are related to late payments can be truly devastating to some borrowers.
As many borrowers choose to apply for an installment loan with bad credit, lenders typically assess high penalties in order to recoup as much of their investment as possible before the borrower chooses to stop paying at all. The large penalties may be understandable, but this makes them no less problematic for those who miss payments by mistake. As such, it's generally wise for borrowers to set up automatic payments so that they do not fall afoul of the late payment penalty fees.
Many individuals who choose to apply for installment loans may notice that they do not get the same types of loan options as others talk about online. Though this can certainly be related to issues like credit and income, it is also often due to state regulations. While there are some general regulations for lending on a national level, certain states also regulate installment loans. Borrowers will often notice that fine print will exclude residents of certain states from specific loan promotions, and this is almost always due to specific state regulations.
Typically, states regulate things like interest rates and even specific loan terms. If a lender's particular model of business does not fit with a state, that lender is more likely to avoid doing business in that state than to modify its business model for a relatively small percentage of potential customers. As such, it is always wise for borrowers to check directly with loan companies to see if an advertised loan product is actually available in the borrower's state of residence. Though a quick internet search can reveal most of this data, individual companies do tend to have more information on the products they offer in specific areas.
While there are ads that promise installment loans no credit check, the truth is that all installment loan direct lenders could check the credit of their potential customers to determine the level of risk associated with the loan. Those who borrow from these lenders, then, should work to ensure that their credit scores are as high as possible to secure the best interest rate that they can procure.
Even if the borrower's credit score is low, he or she can quickly boost the score in a few ways to secure a better interest rate. Some of these methods include, but are not limited to:
Each of these tactics will provide a boost to an individual's credit score, though it will be both minor and temporary. Doing so, though, may reduce the interest rate of a personal loan.
One of the most common assumptions about installment loans is that the lender checks to ensure that the borrower will be able to pay back the loan. While credit checks and income verification are commonplace, the reality of the situation is somewhat more complicated.
For the lender to determine if a borrower could pay back his or her loan, they need to look at factors like:
These factors are considered in many cases. However, the lender is under no obligation to check each of these things. As such, it's entirely possible for a borrower to get approved for a loan that he or she could not payback.
Installment loans can be useful for those who have no other way to secure funds in a timely manner. With that said, these loans do cost more than some realize. As such, borrowers should absolutely explore other options before they choose to apply for an installment loan.
Borrowing from friends and family may seem awkward, but it doesn't have the same kind of stringent requirements or high-interest rates as borrowing from a loan provider. In fact, borrowing from friends and family is generally the best way to borrow money because it's both easier to set up terms that work for all involved. Also, friends and family tend to be more forgiving when other emergencies get in the way of making timely payments.
This is not to say that installment loans should always be avoided, though. Instead, it's important to remember that they should only be taken out in those situations when doing so is the most reasonable option.
Those borrowers who do choose to take out installment loans should always look for ways to reduce the overall cost of the loan. One of the best ways to do so tends to require a basic understanding of how interest is applied to the loan.
If an individual chooses to front-load his or her payment plan with higher initial payments, he or she will be rewarded with lower payments over the later part of the loan. Because the installment plan is stretched out over time, the payments will be restructured in order to ensure that the money paid stays on the same schedule. If the borrower chooses to make larger payments at the beginning of the loan, then, the payments for the remainder of the loan will be adjusted downwards.
This is not to say that making big payments later in the life of the loan is a bad idea, though. Instead, it means that maximum savings come from making those big payments as early and as often as possible. Doing so can absolutely remove some of the most burdensome elements from taking out this type of loan.
Individuals who choose to take out installment loans should always be aware of how the loans work, what kind of commitment must be made when choosing to take out the loan, and the options that will ensure that they are able to avoid penalties. Understanding how loans work is how borrowers can save as possible over the course of the loan. These loans can play a very important role in helping individuals avoid tough financial situations.