Depending on the borrowing needs, there are two main options for consumers who need money – revolving credit or an installment loan.
Revolving credits work with people who need smaller loan amounts that need to be repaid for a shorter period of time. But if you need a larger amount and would like to pay it back in a longer period, an installment loan might be better for you.
Applying for an installment loan online is faster and simpler. If you are planning to take one, you should know how this type of loan works.
What is an Online Installment Loan
Any loan amount that needs to be paid back through fixed monthly payments is called an installment loan. The monthly payments include the interest rate and a portion of the principal amount.
Compared to a traditional bank loan, applying for an installment loan online is faster and simpler making it ideal for those who need immediate funding. The application is simple plus the funds can be available in as fast as the next business day.
There are different types of installment loans that vary according to their purpose and terms and conditions. The most common types are personal loans, auto loans, student loans, and mortgages.
Unlike other types of installment loans, personal loans can be used for many purpose such as car or home repair, debt consolidation, health emergencies or even paying for rent. This makes personal loans convenient for people who need cash to cover for these kinds of necessary expenses.
The payment term for this type of loan may vary from 12 – 65 months depending on the lender. However, since personal loans are non-collateralize, it comes with a high-interest rate.
An auto loan is a type of loan that is taken out to purchase a motor vehicle. Since it is a
A secured loan that is backed up by the value of the vehicle being purchased it has less interest rate compared to personal loans.
Payment terms for auto loans may vary from 36 months to 60 months. If a borrower, defaults on loan, the lender may seize the vehicle. You can get an auto loan either from a direct lender or through a car dealership.
Most of the student loans are offered at a low-interest rate. It is designed to help students pay their school-related fees such as school supplies, books, tuition fees, and living expenses. For this type of loan, repayment may be deferred while the borrower is still in school.
Student loans could either be private or federally funded. Federal student loans are more attractive to borrowers since it offers low-interest rates compared to private loans.
A home mortgage is one of the most common and most recommended forms of debt. It is used to purchase a house or a residence, either primary, secondary or investment residence. A mortgage comes with a fixed or variable rate with payment terms of 15 up to 30 years.
Just like an auto loan, a home mortgage is also a secured loan which means it has a lower interest rate. However, it also means that your home can be taken out once you default on your loan obligations.
How to Avail an Installment Loan
Installment loans are offered by either bank, credit unions, or online lenders. You can also take out a loan from the company where you are buying the product like an auto dealership or a furniture shop.
The lender will require the borrower to provide personal information such as employment or business, physical address, amount of the loan requested, collateral provided, the purpose of the loan, etc.
After the loan application is submitted, the lender evaluates the borrower to determine his/her ability to pay the loan. He/she may be required to provide additional information like financial statements, proof of income, proof of ownership of the collateral, or even the credit report.
If the lender identifies the borrower as risky, he/she may reject the application or extend credit with a high-interest rate to compensate for the risk.
What to Look for in an Installment Loan
The interest rate is the first thing that you need to consider in looking out for a loan. It is also important to check whether the rate is fixed or variable.
If you are planning to pay your loan quickly, a variable rate would be better as you may be able to get a lower initial rate. But it might go up over time. If you are planning to pay it for several years, a fixed rate might be the best way to go.
The next thing to consider is the origination fees. A short-term loan usually has a charge flat fee but origination fees are a set percentage of the loan. If possible, shop around for lenders that offer reasonable fees or none at all.
Generally, a longer-term loan would mean more interest but it will also mean lower payments. If you want to save money on interest, go for a shorter term. However, if your income cannot support a shorter-term loan that comes with higher monthly payments, go for a longer term.
How to Save Money on Installment Loan
Your credit score is one of the deciding factors of the interest rate of the loan. So to save money on an installment loan, work on improving your credit score. A good credit score will give you favorable terms and interest rates.
Making on-time payments on all your current credit accounts is a good start to improving your credit score. It will lower your credit utilization ratio and give a quick boost to your credit score.
Lowering your debt-to-income ratio is also a potential way of qualifying for better rates. For instance, paying off your auto loan or credit cards before applying for a mortgage will give your favorable rates.
Also, checking your credit report for any mistake is a big help. Periodically, check your credit report for any errors before applying for an installment loan.
Finally, paying your loan faster is the simplest yet effective way of saving money on an installment loan. Most lenders allow advance payment. If you can pay your loan earlier, you can cut out several months or years of loan interest.
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