How do installment loans work?
Once you are approved for an installment loan, the lender usually deposits the funds into your bank account. You then repay the loan amount, plus interest, over the term indicated in your loan agreement. For example, if you get a loan of $ 2,000 with a repayment term of 12 months and an annual percentage rate of 11.8%, you will make 12 payments of $ 178.
Types of installment loans
Many types of loans share the payment structure – you might even have one now. Here are some examples of installment loans:
Personal loans: A fixed rate unsecured loan that you pay off in fixed bi-monthly or monthly installments.
Auto loans: A secured loan, usually at a fixed rate, that you pay back in regular installments.
Student loans: An installment loan that can have a variable interest rate with payments that fluctuate over time.
Where to get an installment loan
Banks, credit unions, and online lenders all offer personal installment loans. Compare lenders to find the one that offers the best loan rates, terms, and features.
Only a handful of domestic banks offer unsecured installment loans. If so, this is probably a good place to start comparing prices, as banks sometimes offer lower rates or more flexible requirements for existing customers.
Small dollar bank loans: Loans under $ 1,000 are rare at large banks; however, customers of American Bank and Bank of America may qualify for a loan of a few hundred dollars which is repaid in three equal monthly installments.
Personal loans from credit unions are available to members of credit unions, usually at lower rates than other lenders. Federal credit unions cap personal loan rates at 18%. Credit unions may also review your membership status in addition to your credit profile when you apply for a loan, which may give you a better chance of qualifying.
Small credit union loans: Some credit unions also offer a type of small personal loan called a alternative payday loan. These loans are typically $ 1,000 or less, repaid monthly over a year or two, have an APR of less than 28%, and may not require good credit to qualify.
Online lenders serve a wide variety of clients. Some cater to borrowers with exceptional credit, while others offer loans to borrowers with bad credit. Online installment loans typically have rates between 6% and 36% and are repaid over two to seven years.
Unlike many banks and credit unions, most online lenders allow you to prequalified to see the rate, term, and monthly payment you’re eligible for. Prequalification does not affect your credit score, so you can check offers from multiple lenders.
Low cost online loans: Low amount loans from online lenders can be difficult to navigate. Some lenders offer small loans with APRs below 36% – the maximum rate that consumer advocates say is affordable – but others charge much higher rates and put borrowers at risk of default. Capital goods fund is an online lender that offers small loans at relatively low rates starting at $ 300 to borrowers in six states.
When is an installment loan a good idea?
Here are three purposes for which a personal installment loan may be a good idea:
Debt Consolidation: An installment loan can consolidate other unsecured debt, including high interest loans and credit cards, into one monthly payment. Obtain a debt consolidation loan is a good idea if the new interest rate is lower than the combined rate of the debt you are consolidating.
Home improvement projects: There are many financing options available for home improvement projects, but if you know how much your renovation will cost and you can qualify for a low rate, an installment loan can be a good way to pay for home renovations.
Emergency room : Because they can be expensive, an installment loan shouldn’t be your first choice in an emergency. Instead, consider alternatives that cost little or no interest. But, if you have a plan for making your payments and need the funds quickly, an installment loan can help. go through an emergency.
Before taking out an installment loan
As with any form of credit, it’s important to take steps to make sure you get a loan that meets your financial goals and budget. Our recommended steps:
Weigh the pros and cons: Installment loans have advantages over other forms of credit, including credit cards, but they also have drawbacks. Learn more on installment loans and consider the pros and cons.
Know your credit score: Borrowers with higher credit scores get lower rates, which means less interest charges over the life of the loan. If your credit needs work, do what you can to increase your score.
Have a plan to pay it off: If you don’t already have one, build a budget that takes into account your loan repayments. NerdWallet recommends allocating 20% of your budget for debt repayment and savings.
Installment loans vs payday loans
Installment loans and payday loans are named appropriately because while you are paying off an installment loan in regular installments, you are usually paying off a payday loan on your next payday.
Installment loans are therefore often more affordable than payday loans. You may find it easier to plan and repay a loan that is split into installments over multiple pay periods.
Installment loans vs credit cards
The fact that you get the money from an installment loan as a lump sum is one thing that makes it different from a credit card. A credit card is revolving debt – you borrow when you swipe your card, pay off, and start over.
An installment loan, on the other hand, doesn’t revolve: you borrow, pay off, and you’re done.