A common type of loan used to buy big-ticket items like cars, homes, and other similar things is called an installment loan. You might have an installment loan that is called something else, like a mortgage. What is an installment loan, and what do you need to know about them before you apply?
The way that installment loans are made
An installment loan is a one-time loan for a larger amount of money that is paid back over a longer period of time, usually measured in months or years. Installments are what people call the payments. There are two kinds of installment loans: those that are backed by something, like a car, and those that are not.
With an installment loan, you get the money all at once. This is different from how you get revolving credit, like with a credit card or a home equity line of credit. You will need to get a new loan if you want more money. Also, unlike payday loans, which must be paid back in full when you get your next paycheck, installment loans give you more time to pay off the debt.
Installment loan examples
People can get loans
Personal loans are loans that are paid back over time and can be used for almost anything. Loan amounts range from $1,000 to $100,000, and most people have between two and seven years to pay back their loans.
A lender will decide if you can get a personal loan and what the interest rate will be based on your income, credit history and score, and any other loans you already have.
Personal loans without collateral are much more common than personal loans with collateral. However, some lenders may let borrowers use a car, savings or investment account, or other asset as collateral for a loan, which could help the borrower get a lower interest rate.
When you get a mortgage, you agree to borrow the value of the property from the lender and pay it back in equal monthly payments over a period of time that is usually between 15 and 30 years.
In this case, the house is used as collateral for the installment loan. If you miss too many loan payments, you could lose the house.
A home equity loan, which is like a second mortgage and can be used to pay for home improvements, is another name for an installment loan.
A loan used to buy a car is another type of secured installment loan. You get a loan to pay for the car and agree to make monthly payments, plus interest, for a period of time that is usually between two and five years. If you don’t pay on time, the lender could take your car back.
Loans for students
Installment loans are what people call student loans because they have to be paid back in equal amounts over time. They may also have fixed or variable interest rates and a grace period after the loan is paid off, during which interest continues to build up but the borrower doesn’t have to make payments every month.
When a business lets you “buy now, pay later” at the cash register, they give you an installment loan. BNPL can be used to break up a big purchase into smaller, equal payments that can be made every two weeks. For example, if you chose to pay for a $200 item in four smaller payments, each payment would be $50.
How installment loans affect a person’s credit score
When someone applies for an installment loan, they often have to go through a thorough credit check. Your credit score may drop a few points for a short time after this kind of check. Also, if you pay back your installment loans on time and regularly, it could improve your credit score.
Reliable lenders such as GADCapital must tell at least one of the three major credit bureaus, Experian, Equifax, and TransUnion, when payments are made on time. Your payment history makes up 35% of your FICO score. Making regular payments on an installment loan helps build a strong payment history.
If you don’t make a payment when it’s due or pay it late, the results could be bad. If you are at least 30 days late on a payment, your credit score could drop by 100 points. Most lenders let clients set up automatic payments, which takes the pressure off of them to always remember to pay.
How to apply for an installment loan and get one
Compare. Because each lender uses a different set of criteria to look at your loan application and decide your interest rate, it is in your best interest to compare the terms of installment loans from many different lenders. When making big purchases, it’s important to look into different ways to pay for them, such as low-interest credit cards and credit lines.
Pre-qualify. By getting pre-qualified for a personal loan or pre-approved for a mortgage, you can find out about possible loan amounts, interest rates, and monthly payments. Your credit score won’t be affected by either of these procedures. After that, you can figure out how the payments will affect your financial plan.
Get more people to know about your application. Before you apply for a loan, you might want to think about getting a joint or co-signed installment loan or putting up collateral for a loan that would otherwise be unsecured. These choices could make it easier for you to get a loan, which could lead to a lower interest rate or a bigger loan. But you should know that there may be consequences if you can’t pay back the loan. Either the co-signer on the loan will be held responsible, or the collateral may be taken away.
Apply. Installment loans are available from financial institutions like banks and credit unions as well as online lenders. The amount of time needed to fill out an application depends on the type of loan and the lender.
People with bad credit can get loans with monthly payments
Borrowers with bad credit may still be able to get an installment loan (below 630 FICO). Some lenders have lower minimum credit score requirements and also look at things like the borrower’s work history, level of education, and amount of past debt. Credit unions and online lenders may work with people who have bad credit, while banks usually only work with people who have good or excellent credit.
High-interest loans without any security
Lenders must tell you a loan’s annual percentage rate (APR), which includes the interest rate and any other fees associated with the loan. Experts in personal finance say that the APR on a loan shouldn’t be higher than 36% to be considered fair.
On the other hand, some installment loans have interest rates of 100% or higher. Installment loans with high interest rates may not look at your credit history or ability to pay back the loan, and lenders may not always report on-time payments to credit agencies. These are warning signs that the loan is, at the very least, too expensive and, at worst, is a form of predatory lending.
Author: Brycen Schinner is a Loans Writer at Gad Capital. Brycen Schinner works as an editor of personal finance. He holds an English literature degree from the University of Colorado Boulder. In the past as a lead editor at eBay as well as a manager of the writer’s team that wrote about eBay’s content team across the globe. He also wrote for Yahoo. After joining Gad Capital in 2013, He has covered subjects that range from personal loans and managing debt.