5 Pros and Cons of Installment Loans You Need to Consider

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Maybe you’re not familiar with the term installment loan. But if you’ve ever borrowed money to pay for your education, your car, or your home, you’ve likely taken one out.

After all, you received a lump sum from a lender and agreed to pay it back over time — or in installments.

Whether you already have an installment loan or are considering taking one out, you’ll want to know more about their finer details.

What are installment loans?

Unlike riskier payday loans, installment loans don’t need to be repaid in full all at once.

Also, installment loans are different from an open line of credit (or revolving credit), as you can’t add to your principal balance after your loan has been disbursed.

For example, a credit card is a type of revolving credit because you can keep borrowing until you’ve hit your card’s credit limit.

Unless you alter your repayment plan with your lender, you pay back your installment loan in equal monthly payments. You cover the initial debt and its accruing interest over a predetermined amount of time.

A $1,000 loan carrying a 15% interest rate over 24 months, for example, would have a monthly payment of $48. The final cost of borrowing the original $1,000 would be $1,164.

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How to find an installment loan

Because an installment loan can refer to a student loan, auto loan, or home loan, to name a few examples, you can find one from a variety of lenders. If you borrowed money for your college tuition, for example, you had the option of receiving loans from the federal government or a private bank.

Aside from banks and newer online lenders, credit unions might be your best option for personal loans. They’re community-oriented nonprofits that can offer greater flexibility on the loan terms you receive. Their payday alternative loans (PALs), for example, cap interest rates at 28%, far below those set by payday lenders and some online banks.

As with any loan, however, you’ll want to compare rates from multiple types of lenders before choosing the most favorable offer. You can evaluate lenders by considering the following criteria:

  • Loan amount
  • Interest rate (fixed or variable)
  • Term length
  • Repayment plan
  • Fee structure

To prepare their offers, reputable lenders take a hard look at your credit history and debt-to-income ratio, among other factors. If you have a subpar credit score and a lot of outstanding debt, you’re unlikely to score a competitive interest rate on a personal loan.

Why you might want an installment loan

Yes, installment loans can be disbursed for all sorts of purposes. If you’re financing a college education, car, or home, it’s pretty obvious why you’re considering installment loans.

But you might also be thinking about covering holiday costs with a personal loan. Say you plan to spend $1,000 on flights, a hotel room, and gifts for family and friends. Without space in your budget, you might consider a loan that can cover the cost of your holiday celebrations. Afterward, you can focus on repaying your loan.

That’s the blessing and the curse of installment loans — and why you might be tempted to use one for various purposes. Like a credit card, these loans allow you to spend money you don’t actually have, which can be both useful and dangerous.

2 pros of installment loans

First, the blessing: Installment loans allow you to delay a large but necessary expense by making small payments over time. Although the interest rates are typically high, the long-term costs could be made up for by the short-term relief.

Here are the pros of installment loans.

1. Repayment terms

Like all loans, installment loans need to be repaid in a set amount of time. If you find yourself needing to borrow for a worthy cause, however, an installment loan can secure you the funds.

This is why it’s important to know what you want out of an installment loan before you start shopping for one. If you know your finances will allow you to repay the debt in three years instead of one, focus on lenders that’ll give you more time to pay it off.

2. Paying a little bit at a time

Aside from a potentially longer loan term, the chief advantage of installment loans is that you can repay your debt in chunks instead of all at once.

Just ensure that you can afford the monthly payment before taking out your loan. Failure to repay your loan can harm your credit score and limit your ability to take out other lines of credit or accomplish other financial goals.

3 cons of installment loans

Now, the curse: Installment loans create a debt that you have to repay over time. Although they can be repaid in smaller chunks, missing one payment can cause your debt to increase dramatically.

Here are three cons of these loans to consider before borrowing.

1. Payday loan-like features

Not all lenders are created equally, so you’ll have to be wary of installment loan lenders that offer dangerous payday loan-like features, such as high interest rates and short repayment terms.

You’re particularly vulnerable if you don’t have a strong credit score or steady income. If that’s the case, you might see lesser-known lenders offer no- or bad-credit loans with instant approval. These loan agreements can come with exceptionally high interest rates and fees. Plus, your credit could be hit harder if you fail to keep up with payments or, worse, default on the loan.

There are also ways to borrow cash quickly without resorting to these disguised personal loans. Credit unions’ PALs, for example, offer consumer protections, like a maximum $20 application fee and a minimum repayment term of one month.

2. Growing interest

Because they’re paid off in installments, these loans will cost you more in interest the longer it takes you to pay them off. This makes getting a low interest rate all the more important.

If you can afford to wait before taking out an installment loan, use the time to improve your credit score. It could save you hundreds or thousands of dollars in accruing and capitalizing interest.

3. Hidden prepayment penalties

By their definition, installment loans can be repaid before the end of your loan term without incurring a penalty. If you can pay off your debt before the term’s end, you should. You’ll save on any interest that would have accrued.

If you pay off that $1,000 personal loan for the holidays in 12 months instead of 24, for example, your final bill will be $1,083. If you don’t pay off your debt early, you’ll pay $1,164 in total.

Be wary of less-reputable lenders hiding prepayment penalties in the fine print of your loan agreement. Not all installment loans are built the same way, so do your due diligence before signing.

Before taking out an installment loan

Before taking on debt, know that you have other options. You might be more familiar with student loan alternatives, like grant aid, scholarship awards, and work-study programs. These help you pay for school without putting you into debt.

As for the alternatives to personal loans, consider ways to avoid bad online lenders. You might request a paycheck advance from your employer, for example.

If taking out an installment loan is your best path forward, take both the positives and negatives into account. Your future self will thank you for it.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.99% – 17.88%1 $5,000 to $100,000
5.69% – 35.99% $1,000 to $50,000
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SoFi Disclosures

  1. Fixed rates from 5.99% APR to 17.88% APR (with AutoPay). Variable rates from 6.49% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of November 4, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.49% APR assumes current 1-month LIBOR rate of 1.81% plus 3.08% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
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  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
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  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
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Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

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