There are many times in life when you may need help to afford big-ticket items. A college education, a car, and a mortgage usually all require financial assistance from a lender. When people need money quickly, they often turn to installment loans.
If you’re not familiar with that term, don’t worry. Installment loans are very common—you may just know them by a different name. In this article, we’ll cover the definition of installment loans, how to qualify, what’s available, and the pros and cons.
What Is an Installment Loan?
An installment loan gives a borrower a lump sum in exchange for an agreement to repay the total amount in regular monthly payments, also called installments. Borrowers also agree to pay interest on the amount received, which is typically included in the monthly payment. Installment loans often have a fixed interest rate rather than a variable rate, which can cause the payment amount to fluctuate based on current market rates.
Depending on the loan agreement, a borrower may repay the total amount within a few months or over multiple years. Upon paying off the loan, the account closes, and the borrower is no longer in debt.
Do I Need a Good Credit Score for an Installment Loan?
Qualifying for an installment loan typically depends on a few factors, one of which is your credit score. Lenders will look at your credit history to determine your financial habits and whether you’re likely to repay the loan. This factor will also determine how much money you can get and the interest rate on the loan.
A higher credit score makes it easier to qualify for a loan and secure a better interest rate. If you don’t have a good score, the lender may see you as a risk, potentially declining your application for an installment loan or approving you with a higher interest rate.
What Types of Installment Loans Are Available?
Installment loans are more common than you may realize. The following five standard types of loans are considered installment loans.
1. Personal Loans
A personal loan isn’t for any specific purchase but rather to be spent at the borrower’s discretion. A lender provides a lump sum of money, which the borrower will repay over an agreed-upon period.
2. Auto Loans
Lenders offer auto loans to help borrowers purchase new or used vehicles. When applying for a loan, you typically have to provide details about the car you plan to buy. If you fail to make a payment, the lender can take ownership of your vehicle and even sue you for financial losses.
3. Student Loans
Student loans cover the costs associated with attending college. However, this type of loan differs from other installment loans because the borrower doesn’t have to start paying it back immediately. Instead, people usually start paying off their student loans after they have graduated and begin working.
A mortgage loan provides the funds needed to buy a home. This type of loan may require a down payment, which the borrower provides to offset the total borrowed amount. If you stop making the required monthly payments, the lender can take possession of your home and evict you, putting the property up for sale to recoup costs.
5. Buy Now, Pay Later Loans
Buy now, pay later loans are often available through retailers and offered on more expensive items. When you obtain this loan type, you pay a small portion of the purchase price upfront, then pay the remaining balance in monthly installments.
What Are the Pros and Cons of Installment Loans?
Nearly 30% of Americans have relied on an installment loan to make a larger purchase. If you’re considering a loan, consider the pros and cons to make an informed decision.
- You can get a large sum of money quickly, helping you to afford what you need.
- Fixed interest rates ensure a consistent payment every month.
- You may qualify to refinance the loan if interest rates drop.
- Making your monthly payments on time can help boost your credit score.
- You can’t change the loan amount after receiving funds.
- The repayment period may spread over multiple years, which can threaten your financial situation.
- If you make a late payment or miss one altogether, it could seriously harm your credit score.
- Depending on the type of loan, the lender could repossess your home or vehicle if you miss payments.
Can You Pay Off an Installment Loan Early?
Your financial situation may change after you get an installment loan. If your income increases or you experience a financial windfall, you may want to pay off your installment loan early. Paying off a loan early can help you save money that you would have spent on interest while protecting you from the stress of debt and monthly payments.
Most lenders will allow you to pay off the loan early or pay more than the required monthly amount. However, some loans include a “prepayment penalty” in their terms, which charges a fee if you pay off the loan ahead of schedule. To avoid this, read the terms of your loan agreement carefully to ensure there is no prepayment penalty in effect.
If you decide to pay off your loan early, make sure you still have an emergency fund in case your financial situation changes again. Taking this step can help you avoid taking on additional debt.
Let Power Finance Texas Help You
Now that you understand the definition of installment loans, you may be considering one for your own financial situation. If you need money quickly, an installment loan can help you cover the costs of something unexpected, such as a car repair or medical emergency. At Power Finance Texas, we can get you a loan of up to $1,250 in as little as a day.
We understand expenses can arise anytime, often without warning, so we’re here to help. When you need cash quickly to take care of yourself and those who depend on you, reach out to Power Texas Finance to learn how we can assist.