How Do Installment Loans Work

How Do Installment Loans Work
12 Oct 2017 11:36am
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Installment loan is a general term that applies to any type of loan that can be paid back in installment or regularly scheduled payments. Each installment made against this loan will include a portion of the principle amount that you have borrowed along with the interest charged on the debt. The factors that will determine the regularly scheduled loan payment include the total amount of the loan, the interest rate charged, the length, and term of the loan.

What Is An Installment Loan?

Auto loans, personal loans and mortgage loans are some common examples of installment loans. Depending on which loan you are applying, you will be charged fixed or variable interest rate. For instance, mortgage loans often have variable-rate, where the interest rate is prone to change during the loan term. Apart from mortgage loans, all other installment loans are fixed-rate loans. The interest rate charged over the loans term is fixed right from the time of borrowing. So the monthly payment amount will stay the same throughout the loan term. Due to fixed rates it becomes easy for the borrowers to budget the payment in advance.

Secured or Unsecured

Installment loans can be either secured or unsecured. When applying for a mortgage loan, it has to be collateralized with the house for which the loan is being used to pay for. While the collateral for an auto loan is the vehicle itself that is being bought with the loan. One can also find installment loans that are extended without collateral. Such loans are often referred to as personal loans and are offered based on the creditworthiness of the borrower. For that lenders will go through the credit score and the ability to repay by the borrower. Compared to the interest rate charged on collateralized loans, the interest rate charged on a non-collateralized loan is higher.

The Process

A small online form is all that a borrower has to fill in to apply for an installment loan. In the application a borrower is required to specify the purpose of the loan, for example the purchase of house or a car. The lender will then discuss about the various options with the borrowers related to down payment, term of the loan, payment schedule and the amount payable every month. The lender will also inform you about how you can obtain lower monthly payment and lower interest rate. Lenders will also check the creditworthiness of the borrower to determine the loan amount and terms ahead of extending credit.

Fee And Charges

No matter what loan you are applying for, lender will charge fees in addition to interest charges, such as application fee, processing fees and other potential additional charges such as late payment fees. Repayment should be made on time and as instructed by the lender. It is often possible to save on interest and avoid late fee by making payment of the loan before the end of the term. Be careful, as some lender may impose prepayment penalties when a loan is paid off early.

Advantages Of Installment Loans

Installment loans are flexible loans. Based on the specific needs of the borrower in terms of the loan amount and the length of time that fits their repayment ability, these loans can be easily tailored. Compared to other finance options, installment loans make it easy for borrower to obtain finance at a substantially lower interest rate. Repaying back in installment allows the borrower to keep more cash on hand for other purposes instead of making large cash payout.

Disadvantage Of Installment Loans

If you have chosen a long term loan with fixed interest rates then you might be making payments at a higher interest rate compared to the prevailing market rate. Getting locked into a long-term financial obligation can be a huge disadvantage. Besides, if at some point you are unable to meet the scheduled payments you will risk default and you may have to lose the collateral that you might have used to secure the loan.

Whether you have bad credit or you are on a lower income, installment loans can be applied as long as you can afford to make the repayments. Generally, lenders will consider your monthly income, credit history, employment, and checking account information ahead of determining your eligibility. When applying you need to keep in mind that installment loans are not legal in all the states. So, collect all information ahead of applying for installment loans.