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.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|