Installment Loans
An installment loan is a type of loan that gives you an extended period of time to pay off the amount you’ve borrowed plus any applicable interest and fees.
Here’s how they work:
- You apply with the lender you select, either online or at a brick-and-mortar location.
- The lender processes your loan application to determine if you’re eligible for a loan, and decides on suitable terms.
- The lender presents the loan offer to you. This is the point in the process where you can request to make modifications to the financing terms, including the loan amount and repayment period to make your monthly payments more affordable.
- You provide any supporting documentation the lender requests to finalize the loan.
- The lender disburses funds into your bank account.
- You make monthly payments, usually for the same amount, until the loan is paid in full (monthly payment amounts may fluctuate with a variable rate installment loan).
Key Benefits of Installment Loans
Competitive interest rates
Unlike payday and title lenders, installment loan lenders take your creditworthiness into account when evaluating your loan application. This means that you can qualify for a significantly lower interest rate if you have a decent credit history.
Extended repayment periods
No need to scramble to find the funds to repay the loan plus any accompanying interest and fees by the next payday. With an installment loan, you’ll have anywhere from six months to a few years to pay off the loan.
Easy application process
Whether you go through a brick-and-mortar or online lender, you should be able to apply online. And you should receive a lending decision in minutes.
Rapid funding
Depending on the lender, you could receive the loan proceeds in your account in as little as one business day. Bank holidays could delay the process, but you won’t have to wait weeks to get the cash you need.
Minimal fees
You may have to pay an origination fee between one and three percent when the loan is opened. In most instances, the lender will roll this amount into the loan, and you’ll repay it back over time. But you shouldn’t incur any additional fees unless you are late on your monthly payments. And if you decide to pay off the loan early, most installment loan providers do not charge prepayment penalties.
Where to Find Installment Loans
Installment loans are available through traditional brick-and-mortar financial institutions, community banks, credit unions, and online. If you have an existing relationship with a local financial institution, it doesn’t hurt to pay them a visit to inquire about the types of installment loans they offer, and what types of interest rates and terms to expect. But keep in mind that they may require a hard inquiry to your credit to dole out this information.
A better option: start by perusing the offerings available from online lenders. Most of their websites provide you the opportunity to get prescreened for a loan with no impact to your credit. And if you really want to step your search up a notch, use an online loan search and comparison tool to view a variety of online options that may be available to you.
Do Installment Loans Impact Your Credit?
When applying for an installment loan, your credit will only be impacted if the lender performs a hard inquiry. According to myFICO.com, your score will drop by two to five points each time you submit an application.
But if the lender uses a third-party screening service or only conducts a soft inquiry, your credit score won’t be impacted. This is good news for borrowers who are trying to get their credit back on track.
Once you’re approved for the loan and the proceeds are disbursed into your account, your credit rating could benefit a great deal. How? Well, payment history is the biggest component of your FICO score, to the tune of 35 percent. And if the lender reports payment activity to the credit bureaus, your report will now reflect positive payment history every month. However, it’s important to make timely payments each month and stay on top of all your other debt obligations for this to be effective.
Can You Get An Installment Loan With Bad Credit?
It’s possible to get approved for an installment loan with bad credit. However, you should proceed with caution as these debt products typically come with significantly higher interest rates. While they’re much more affordable than payday loans or cash advances, the downside is that the lender has several months to collect interest from you. So, there’s a possibility that you could end up paying far more in interest than the amount borrowed in the first place.
How to Qualify for an Installment Loan
Each lender will have their own distinct set of qualification criteria. But generally speaking, you should:
- Be 18 years or older
- Have a physical address, along with a valid work and home phone number (the lender may also request your email address)
- Be employed and earn a steady source of income (some lenders will consider alternative forms of income, including self-employment earnings, government benefits, unemployment, child support, and alimony)
- Have a valid bank account that’s in your name
- Not currently be involved in bankruptcy proceedings or have filed for bankruptcy recently
Is An Installment Loan Right for You?
It depends on your financial situation. If you’re already struggling to get by, taking out a large installment loan could mean trouble for your finances. The lender may approve you for a large loan with a decent interest rate and relatively low monthly payments. But if you’re unable to keep up with the monthly obligation, your credit rating will suffer. And once your credit score is in the trenches, you’ll find it much more difficult to qualify for other credit products. In the event you do qualify, expect to pay exorbitant interest rates.
By contrast, if you need to make a big-ticket purchase but don’t have the cash on hand, an installment loan may be right for you as long as the monthly payments don’t stretch your funds and budget too thin. Ideally, you should aim for an amount that doesn’t cause issues with your finances month after month and can possibly be paid off early to minimize the interest paid over the life of the loan.
The Bottom Line
Installment loans can get you the fast financial relief you need. But it’s important to review the terms and conditions of the contract before signing on the dotted line to ensure you know exactly what you’re signing up for. Furthermore, understanding the monthly payment and costs associated with the loan are essential to make a plan that will enable you to pay back what you borrow in a timely manner.
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