What Are Installment Loans?
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Installment Loan Definition
How Installment Loans Work
Principal Amounts
Interest Rates
Credit Score Requirements
Repayment Terms
The amount borrowed The interest rate charged The length of the loan
Monthly Payments
Four Types of Monthly Installment Loans
Personal loans Home loans Student loans Auto loans
1. Personal Loans
2. Home Loans
3. Student Loans
4. Auto Loans
Pros and Cons of Monthly Installment Loans
Pros of Installment Loans
Flexibility. The flexibility of installment loans allows borrowers to seek money they need at terms that can make it reasonable to repay, allowing consumers to make large purchases. Fixed payment schedule. The fixed payment schedule of installment loans can make it easy to budget for loan payments. Plus, you’ll know when your loan will be paid off. Potentially competitive interest rates. Interest rates are typically lower for installment loans than other options, especially when compared to credit cards and payday loans. Prepayment can allow for interest savings. Paying off the loan more quickly can help borrowers to save money on interest (though be sure to investigate prepayment penalties before proceeding).
Cons of Installment Loans
Possibility of going into debt. The ease of borrowing can make it too easy to go too far into debt. Could get stuck with a higher interest rate. On long-term loans with a fixed rate, market interest rates can go down during the term, but the borrower will still be paying the original higher rate unless they refinance. Can cause financial damage if unpaid. If the consumer can’t meet the obligation, their credit scores may be harmed and they may even go into default. Additionally, if the loan is secured, collateral may be seized. Fees. Installment loan fees can be costly.
Installment Loans vs Payday Loans
Alternatives to Installment Loans
Credit cards Lines of credit Borrowing from friends and family members Borrowing against your 401(k) plan or other retirement account Asking your employer for an advance on your salary
Typical Installment Loan Application Process
Name Address Telephone number Social Security number Date of birth
The Takeaway
Frequently Asked Questions
Photo credit: iStock/shapecharge
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About the Author
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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