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What Is an Installment Loan?
If you’ve considered borrowing money for an expense, you may have wondered, “What are installment loans?” Installment loans can get you the funds you need quickly and may be used for purposes like paying off higher-interest debt or covering the purchase of a large expense.
What is an installment loan?
Installment loans are any type of loan that provides a lump sum of money and requires loan payments back on a fixed schedule, or in installments. The loan payments are fixed amounts with fixed interest rates, so the payments you’ll be making to pay off the loan are predictable over the length of the loan.
Some people use installment loans to pay for significant expenses, like college, a home or a car purchase. Installment loans can also be used to consolidate credit card debt, pay off emergency expenses like medical bills and cover large purchases like home remodeling.
How do installment loans work?
When you’re taking out an installment loan, you’ll let the lender know what you want to borrow and what type of time frame you want to pay off the loan. Depending on your credit score and credit history, the lender will offer you a fixed interest rate on the loan and specific terms.
With installment loan terms, you may be required to offer up collateral to take out the loan. Other terms will include late fees for missed payments and the payment due date each month. If you do miss a payment on an installment loan, your credit score may be affected.
[ More: The Best Personal Loan Rates ]
Installment loans require monthly payments to pay off the loan. You’ll know what amount to expect for each payment and when you’re supposed to pay by, so payments are predictable. The monthly payment amount will go towards paying off the principal, as well as some of the interest you owe.
If you miss a monthly payment and are late with paying it, you’ll likely have to pay for late fees. Your credit score may also be negatively impacted by missing a monthly payment.
Interest and APR
Interest rates and APRs have similarities, as well as some key differences. The interest rate refers to the percentage of the principal loan amount remaining that will be tacked on what’s due. APR — or annual percentage rate — refers to the annual cost of a personal loan to a borrower, including fees. So while the interest rate only applies to the loan amount, an APR will account for fees like installment loan insurance, loan origination fees, closing costs and discount points.
[ Related: What Is APR? ]
Each month, the total amount of what you pay is determined by the interest rate, which is determined by your credit score and history. Bad credit loans usually come with higher rates and fees. The APR represents much you’ll pay each year for all your loan costs, including fees.
Pros and cons of installment loans
|Pros||Money to pay for large expensesMay have low interest ratesPredictable payment installments|
|Cons||Little flexibilityInterest payment is requiredAffects your credit score|
Bad credit installment loans
Unsecured and secured loans vs. installment loans
Installment loans may be both unsecured and secured. With unsecured installment loans, there’s no collateral required. You get your loan terms and the lump sum of money you’re borrowing and agree to make installment payments that include payment for both the principal and interest you owe on a set schedule.
With secured installment loans, you’ll have to put up collateral to get the loan. This means if you miss your payments or fail to pay off the loan completely, the lender can take possession of the collateral you offered, like your car or home.
Generally, the better your credit score is, the more likely you’re able to get an unsecured loan. If you have no credit or poor credit, you may find you’re more frequently eligible for secured loans compared to unsecured loans.
[ Read: Emergency Loans for the Unemployed ]
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