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Education News Simulator Your Money Advisors Academy Table of Contents What is an installment loan? Kinds of Installment Loans Secured vs. Unsecured Installment Loans Application for an Installment Lending Advantages and disadvantages Installment Loans and Credit Scores The Bottom Line Credit & Debt Buy Now , Pay Later How do Installment Loans Work Flexible terms and low interest rates are the main installment loan benefits A.J.B. Maverick. J.B. Maverick Last updated May 20, 2022. Reviewed by Thomas Brock In fact, Ryan Eichler has checked the facts. An "installment loan" is a broad concept that covers the majority of personal and commercial loans available to borrowers. Installment loans encompass any loan which is repaid via regular installments or payments. If you're thinking of taking out one of these installment loan there are pros and cons to think about first. Here's everything you need be aware of prior to taking out a loan. The key takeaways Installment loans are either commercial or personal loans that borrowers are required to pay back by making regular payments or installments. Each installment, the borrower pays back a proportion of the principal loaned and is also responsible for the payment of charges on that loan. Some examples of different installment loans include auto loans as well as mortgage loans as well as personal loans as well as student loans. The advantages associated with loan installment loans comprise flexible term and lower costs of interest. The disadvantages of installment loans are the potential for the loan being in default and losing collateral. What is an installment loan? An installment loan provides a borrower with an amount that is fixed that has to be paid back in regular payments. Each installment loan includes repayment for a proportion of the principal amount borrowed and also the payment of interest on the loan. The main factors that affect the size of each monthly loan payment include that of loan to be paid, the interest paid to the borrower and the length or term of the loan. The payment amount that is regular that is typically due monthly remains the same for the entire loan term, making it easy for the borrower prior to making the needed payments. Borrowers generally have to pay additional charges as well as interest charges, such as processing charges, loan origination fees, and possible additional charges such as late fees. Different kinds of installment loans Common types of loans include auto loans along with mortgage loans, personal loans as well as student loans. In addition to mortgage loans and personal loans, which are usually variable-rate loans where the interest rate fluctuates over time of loan Most installment loans can be considered fixed-rate loans which means the interest rate charged over time of the loan stays fixed during the time of borrowing. Secured vs. Unsecured Installment Loans Installment loans may be either secured (collateralized) or unsecured (non-collateralized). Mortgage loans are collateralized with houses that the loan is intended to purchase, and the principal collateral used for auto loan is the vehicle purchased with the loan. Certain installment loans (often called personal loans) are granted without collateral being needed. The loans extended with no requirement of collateral are awarded based on the borrower's creditworthiness typically demonstrated through an assessment of credit scores and the ability to pay as proven by the borrower's earnings and assets. The interest rates charged for a non-secured loan typically exceeds the rate for a similar secured loan in recognition of the larger risk of not being able to repay the lender accepts.1 If you're contemplating taking out an installment loan, you may want to start by looking up a personal loan calculator to determine what kind of interest rate comfortable with. Making an application for an Installment Credit The borrower may apply for the installment loan by filling out an online application with the lender. The lender usually specifies reasons for the loan for example, purchasing a car. The lender discusses with the borrower options with regard to questions like down payment as well as the duration of the loan as well as the payment schedule, and the payment amounts. When a person needs the loan amount of $10,000 to finance the purchase of a car in the example above, the lender informs the person who is borrowing that taking a bigger downpayment could secure the borrower an interest rate that is lower, or the borrower might get lower monthly payments by signing the loan for a longer term. The lender also evaluates his creditworthiness to decide the maximum amount of credit available, and the loan terms they are willing to give. The borrower is typically able to retire their loan in the form of required payment. Borrowers will usually be able to save the interest cost by paying off the loan prior to the expiration of the terms stipulated within the loan agreement. Certain loans require prepayment penalties when someone pays off their loan early. Advantages and disadvantages Installment loans are versatile and are easily customized to the borrower's requirements regarding the loan amount as well as the length of time which best suits the ability of the borrower to repay it. These loans enable the borrower to receive loans at a considerably lower rate of interest than is typically available through loans that are revolving in credit which includes credit cards. In this way, the borrower is able to keep more cash on and use it for other purposes, rather than making the expense of paying cash. Pros Financing big purchases Payment amount typically stays the same throughout loan duration Usually possible to save the cost of interest by repaying your loan in advance Cons Loan fees can be costly. Credit damage can occur by late or non-payment payments Possibility of borrowing more than the amount needed For longer-term loans the disadvantage is that the borrower is making repayments on a fixed-interest loan with a higher interest amount than the market rate. The borrower may be in a position to refinance the loan with the current rates of interest. The main drawback of an installment loan originates from the borrower being locked into a long-term financial obligation. At some point, circumstances may make it impossible for the borrower of paying the monthly payments that could result in default, as well as the possibility of losing any collateral used to guarantee the loan. Installment Loans and Credit Scores Being able to repay an installment loan at the time it is due is an effective way to enhance your credit. Credit history is the single most significant factor in your credit score. A prolonged track record with a history of responsible borrowing is good for your credit rating.2 As we mentioned, your credit score may be impacted if you fail to make your payments on time or if you fail to pay the loan. This is also considered a red flag in eye of lenders. The Bottom Line An installment loan can allow you to finance major purchases, like a car or your home. As with any loan, there are pros and cons that you should consider. There are advantages to flexible terms and lower interest rates, but one of the biggest drawbacks is potential for default. If you're planning to take on an installment loan, be sure to explore rates and the terms of loans before signing the dotted line. Article Sources Related Articles Man looking over papers Personal Credit Payday Loans vs. Personal Loans What's the Difference? Small red home with money hanging out with the look of tape from a dispenser set on a flange of $100 bills. Home Equity Housing Equity Loans vs. HELOC: What's the Difference? Model of a House on an calculator Mortgage Mortgage Calculator Personal Loans Are personal loans considered income? Bills tower in man's hands and the blue background of documents. Loans The Most Effective Methods to Borrow Money Two people who are working on papers Student Loans Can student loans be amortized? Partner Links Related Terms The Simple Interest Definition: Who Benefits, With Formula and Example Simple interest can be a simple method of calculating the interest cost on a loan. More Signature Loan Signature loan is a type of personal loan that banks and other finance companies that depend solely upon the signature of the borrowers and a promise to make payments as collateral. More Subprime Auto Loan The subprime automobile loan is a kind of loan that's used to finance the purchase of a vehicle. The loan is available to people with low credit scores or limited credit history. more What Is a Mortgage? The types, how they function and examples A mortgage is an loan which is used to purchase or keep real estate. more "Default: What it means What happens when you are in default, some examples A default happens when a borrower is unable to pay the required amount on a debt, regardless of the amount, such as interest or principal. more What is an Amortization Schedule? How to Calculate Using Formula An amortization schedule can be described as a complete set of regular blended loan payment schedules, which show the principal amount and the interest rate. more

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